When using FCFF in a DCF model, then the correct formulas is: CFO + Int(1 - Tax rate) - FCInv - WCInv Under this method you will discount using WACC, BUT… If you do not add back “Int(1 - Tax rate)”, will you still get the same result (intrinsic value of EQUITY) if you discount by required return on equity, and not WACC? Note: I still subtract debt and add back cash

lxada, I don’t think it works that way. First, unless I’m mistaken, you don’t subtract WCInv from CFO in either the calculation of FCFF or FCFE, as working capital investments are already reflected in CFO. My understanding is: FCFF = CFO + Interest(1 - tax rate) - FCInv FCFE = CFO - FCInv + Net Borrowing Also, the most direct route from FCFF to FCFE is: FCFE = FCFF - Interest(1 - tax rate) + Net Borrowing I think the figure you calculate will be too small. Even after correcting for the “-WCInv” part of the FCFF calculation, you’re still discounting the whole thing by r_e which will cause a lower PV than discounting by WACC. Anyway, you can plug in some numbers to your experiment to see what happens…

You are right…I didn’t mean to add back WCInv. I did enter the data to see what happens and it does not give me the same number. I came across a firm that values stocks this way and I do not think they are doing it correctly.