June 2012 Nente Co (a)

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May 21, 2017 at 1:37 pm #387254
pineapplemango
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Relates to part (a)
1. Question requested for FCF instead of FCFE, so why is debt value deducted from firm value to calculate the equity value?
2. Does calculating the current value of co using FCF *ALWAYS* mean minusing devt value?
3. If so, does that mean it’s FCFE instead of FCF? (Just wondering if I’m having a misconception)
Thank you, Sir.
May 21, 2017 at 7:01 pm #387301
John Moffat
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Free cash flow gives the value of the whole company (debt + equity).
So the value of the equity is the value of the company less the value of the debt.
Free cash flow to equity, gives the value just of the equity, and is the free cash flows less the debt interest.
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