Metiu Metev, an analyst with Sofia Equity Researchers, has gathered the following information about Balkan Steel Mills (BSM): Current year’s operating free cash flow BGN 5 million Cost of equity capital 15% Weighted average cost of capital 12.40% Estimated long-term growth rate 6% Given this information, Metev’s best estimate of BSM’s intrinsic value (in BGN millions) would be closest to: Select exactly 1 answer(s) from the following: A. 55.56 million. B. 58.89 million. C. 78.13 million. D. 82.81 million.
c?
Answer is D but I want to know - how did you decide between WACC and Cost of equity ® in the denominator of GGM. Especially this cash flow is not FCFF (discounted at WACC) not FCFE (discounted at cost of equity)
It looks like this one is FCFF 5*1.06/(12.4%-6%)=82.8125
discount with WACC when it’s free cash flow to firm = market value of debt + market value of equity discount with Ke when it’s free cash flow to equity = market value of equity
ah yes 5 (1.06) / (.124-.06) I used WACC because it was operating free cash flow, which is before interest and therefore represents free cash flow to the entire capital structure, not just equity holders
FCFF - major point is it if CFO+ after tax interest expense-capex Ignoring Capex, I would expect an adjustment for after tax interest expense.
with the information in this problem, i think you would go with firm cost of capital rather than just equity
intrinsic value of the firm = use wacc
Good point mib20, also realized if you calculate FCF for EBIT- interest expense is not deducted and hence it is FCFF, therefore use WACC.
EBIT = FCFF…huh?
CFAI Text Volume 5 page 184 and 185 i believe…of all the things to remember I the page numbers! But it clearly shows that for OFCF to use WACC, and for FCFE to use cost of equity