Why deduct Accounts payable from value of firm to arrive to value of equity?

[Terry141191]

Hi everyone, As you know we’re couple of days away from exams and while doing questions, i got the below mentioned question wrong, i fail to understand why account payable should be deducted. I thought only Value of debts should be excluded. Sorry for silly question. From the mock exam 2012 Afternoon session, Question 32: B is correct. FCFF2012 = [(EBITDA – Dep’n & Amort) × (1 – T)] + Dep’n & Amort – Cap Ex – Increase in WC = [(105.1 – 6.4) × (0.75)] + 6.4 – 4.0 – 1.0 = 75.425. Capitalization rate = 11.0 – 5.0 = 6% Value of invested capital = 75.425 ÷ 0.06 = 1,257.08 Value of debt = Accts. Payable + Notes payable + LT debt = 10 + 8 + 30 = 48 Value of equity = 1,257.08 – 48.0 = 1,209.08

[rawraw]

An accounts payable is a debt. We owe someone money

[Privateer]

Accounts payable is a liability, not debt. As far as i know one should only deduct debt (interest bearing liabilities) from firm value to get the equity value.

[jaychou]

@Terry141191

Hi everyone, As you know we’re couple of days away from exams and while doing questions, i got the below mentioned question wrong, i fail to understand why account payable should be deducted. I thought only Value of debts should be excluded. Sorry for silly question. From the mock exam 2012 Afternoon session, Question 32: B is correct. FCFF2012 = [(EBITDA – Dep’n & Amort) × (1 – T)] + Dep’n & Amort – Cap Ex – Increase in WC = [(105.1 – 6.4) × (0.75)] + 6.4 – 4.0 – 1.0 = 75.425. Capitalization rate = 11.0 – 5.0 = 6% Value of invested capital = 75.425 ÷ 0.06 = 1,257.08 Value of debt = Accts. Payable + Notes payable + LT debt = 10 + 8 + 30 = 48 Value of equity = 1,257.08 – 48.0 = 1,209.08

i think this was a misktake in last year mock. I remember someone asked last year… Checked errate yet?

[Terry141191]

ow thats sounds good to me, i also find it odd they deducted it. Thanks

[rawraw]

@Privateer

Accounts payable is a liability, not debt. As far as i know one should only deduct debt (interest bearing liabilities) from firm value to get the equity value.

Isn’t his question FCFF and not equity value? I misread his question

[Privateer]

He is calc. equity value from FCFF…

[mje173]

@Terry141191

Hi everyone, As you know we’re couple of days away from exams and while doing questions, i got the below mentioned question wrong, i fail to understand why account payable should be deducted. I thought only Value of debts should be excluded. Sorry for silly question. From the mock exam 2012 Afternoon session, Question 32: B is correct. FCFF2012 = [(EBITDA – Dep’n & Amort) × (1 – T)] + Dep’n & Amort – Cap Ex – Increase in WC = [(105.1 – 6.4) × (0.75)] + 6.4 – 4.0 – 1.0 = 75.425. Capitalization rate = 11.0 – 5.0 = 6% Value of invested capital = 75.425 ÷ 0.06 = 1,257.08 Value of debt = Accts. Payable + Notes payable + LT debt = 10 + 8 + 30 = 48 Value of equity = 1,257.08 – 48.0 = 1,209.08

Becasue equity is everything within Assets that isn’t debt.

A = E + L

[blackjack21]

Did I understand your question correctly? Isn’t this level 1 stuff? I mean A/c Payables is part of Current Liabilities. It had to be subtracted from value of the firm to arrive at Equity value.