Dear All:
To find that Firm valuation , use WACC to discount and to find the Equity valuation , use Required rate of return ®. According to the equation Equity = Assets - Liability , it seems to me that the Equity is the firm value becuase it is the net assets of the Firm, so what is the difference between Firm valuation and Equity valuation .
Thank you so much for your time.
You are joking, right ? If not, the difference is that one is value of the equity on the book of the company and what it should be in the market. FCFF and FCFE is derived primarily from the income statement whereas you are talking about the balance sheet.
Please do a review of level 1 financial statements if you are not clear with the concepts!
Most of the answers for your questions can be obtained from Level-1 forum. Pls post all your L2 questions in L1 forum.
Think about what makes up a firm’s value: MV of debt/equity/preferred equity + noncontrolling interest.
Since there are multiple sources of financing involved that makes up that value, you need to take the weighted average of those financing costs and reach a WACC to discount the cash flows with.
You are unclear about what you mean by “equity valuation.” If you are talking about FCFE, then unlike firm value, you are only valuing cash flow to equity shareholders and thus, use only what is required by those shareholders. Thus, it will be appropriate to use not WACC (which again, accounts for various sources of financing), but required rate of return on equity or cost of equity, whatever you want to call it.
Think about what makes up a firm’s value: MV of debt/equity/preferred equity + noncontrolling interest.
Since there are multiple sources of financing involved that makes up that value, you need to take the weighted average of those financing costs and reach a WACC to discount the cash flows with.
You are unclear about what you mean by “equity valuation.” If you are talking about FCFE, then unlike firm value, you are only valuing cash flow to equity shareholders and thus, use only what is required by those shareholders. Thus, it will be appropriate to use not WACC (which again, accounts for various sources of financing), but required rate of return on equity or cost of equity, whatever you want to call it.
Going along those lines, you could say the value of the firm is the total assets. These assets are financed by liabilities (debt) and equity. Once the liabilities are paid off, you are left with equity - net assets are those which are attributable to the equityholders.
Firm value is calculated using WACC because the cash flows are those which are available to pay off debt and equity holders (i.e. those who financed total assets). Required return on equity is used to discount cash flows only available to equity holders, i.e. the interest expense has already been paid to those who financed assets via debt so we are only interested the cash flows available to those who financed net assets … that’s one way it might help you to think of it.
Firm’s value is the value of total assets. We use WACC to calculate Firm’s value as firm is financed by debt and equity both.