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Hello Mr Moffat
I have a question about the valuation of the company.
As far as I know, if we want to calculate the value of each share of the company, first we should calculate the value of the company (by PE ratio, free cash flow method, or …..).
Then:
Value of the company = value of the equity + long term liabilities.
So the value of each share is : (Value of the company – long term liabilities) / number of sharesThis method is used in June 2010, question 1, part i (using free cash model).
But I don’t know why in June 2013, Q2, part c (using PE ratio), the answer says the value of each share = value of the company / number of shares. Why long term liability is NOT deducted in the question ?Thank you
What you say at first is correct – that the value of the shoes is the total value of the company less the long-term liabilities. If we were using free cash flow, then this would give the value of the company including long-term liabilities.
However, using PE ratio gives the value of the shares directly (not the value of the whole company) and so it is not necessary to subtract the long-term debt.
Hello Mr Moffat
I have 4 questions about the valuation of the company.
if we want to use FCFE then is it correct to say:
1-Value of the company found by FCFE formula = value of the equity(ONLY)?
2- g=re (cost of equity) * b ?but if we want to use FCF then is it correct to say:
3-Value of the company found by FCFE formula = value of the equity + long term liabilities.
4- g=ke (cost of capital) * b ?thanks
I don’t know what you mean by formulae – it is not a question of using formulae!
FCFE are the cash flows available to equity – i.e. after interest payments. These are discounted at the cost of equity and give the market value of equity.
FCF are the cash flows before any interest payments. These are discounted at the WACC and give the value of the company (equity + long-term debt).
The calculation of growth rate depends on the question. Sometimes the expected growth rate is given; sometimes you are expected to use past growth; sometimes you are given the retention rate and return on reinvestment, in which case it is Gordons growth formula. (Ke never means cost of capital. Ke is the cost of equity which is the same as Re)
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