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Hi John, thank you so much for your efforts to provide smooth learning experince!
I have been going over Chapter 16 on valuation of M&As. How do the FCF to equity and APV differ from each other? FCF to equity seems quite similar to the steps in APV’s FCF calculations before adding the tax benefits of financing. Is it because we do not consider the interest expense in the APV when calculating NPV, but still use the cost of equity? I am a bit confused.
Free Cash flow to equity is used to calculate the market value of equity. So we discount the cash available to equity (after interest) at the actual cost of equity.
APV is used to appraise investments when there is a substantial change in gearing. We discount the investment flows (before interest) at the cost of equity if there was no gearing in the company. We then adjust for the tax benefit on the debt raised for the investment.
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