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Ok, So I conclude from all this that FCF discounted to PV equals Value of Equity. And when we apply Growth formula to discounted FCF, what we get is the non-discounted FCF. Please correct me if I am wrong.
Also, If am am to buy a company today, will I be looking at discounted FCF or non-discounted FCF. In my opinion it should be discounted FCF but the suggested answers multiplies it by ‘share price as a multiple of free cash flow’ and the answer becomes 8 times more. This is what keeps bothering me.If they are not the same thing ( Equity Value and FCF), then what is the relationship between them and How to calculate one from the other? Most importantly, If I am to buy a company, the consideration I will pay will be equal to the ‘FCF’ or the ‘Equity Value’?
In FM I believed that consideration should be equal to Equity Value.
In AFM I was told that consideration should be equal to FCF.
So I assumed them to be the same thing.In Q 25 of BPP Kit, aka Selrone, Growth Formula is applied to Free Cash Flows of an ungeared Company to calculate Current Equity Value. If Equity Value and Free Cash Flow are same thing, then why is Growth being applied to one, to find another? Free Cash Flow is 7M and after applying Growth to it, Current Equity Value becomes 60.1M. How are these two different from each other?
Hmm, I think I was going too much towards perfection and I believe that much perfection is not needed. Just one more thing. In areas where the examiner is testing my views, like Non cash consideration in IFRS 15. How should I answer such topics. Should I go like ‘As per IFRS 15 Non cash consideration should be treated like this’ (even though I have not seen that written anywhere in the books), Or should I say ‘IFRS 15 does not talk about treatment of Non Cash Consideration, So the given scenario should be treated as per Framework (Relevance and True and Fair View).
