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Sir, I am confused as to whether we should be using
1)the firm’s value of equity AND debt or
2)the firm’s value of equity alonewhen calculating the firm’s value.
With reference to Nahara Co. (DEC 14), the value of the individual companies were calculated based on equity alone (even though both were geared).
However in Pursuit Co. (JUN 11, adapted by Kaplan), the value of the companies were calculated by discounting the firm’s free cash flows, which equals the firm’s value of equity and debt.
Which of these approaches are correct? Does it simply come down to the amount of information given in the questions?
Both approaches are correct, and it does indeed come down to the information given in the questions.
(Incidentally, you can find lectures working through the while of the Nahara question if you follow the link to ‘Revision Kit Live’ on the main Paper AFM page of our website.)
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