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Hi John,
In FCF to equity, we disount the free cash flows at the cost of equity. If we are given thebeta of the company and the company is levered, we will simply find the asset beta and calculate the cost of equity as if the company is unlevered. Am I correct? I have to remove the impact of financing to calculate the cost of equity for both FCF to equity and APV.
Thanks in advance for your reply. Warmly,
They are two completely different things.
If calling the equity we discount the free cash flows to equity at the actual cost of equity (not the ungeared cost of equity).
With APV investment appraisal we discount the project flows at the ungeared cost of equity and then adjust for the tax shield on the debt.
Yeah! The terminology is very similar therefore confusing. Finance world needs to come up with better descriptions for these two distinct discount factors. Thanks for your response! 🙂
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