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Hello,
I wanted to ask why are we not using equity valuation in both cases? For Pursuit we use total firm value (50:50 equity to debt) adn for Fodder we use FCFF but we do not deduct debt. Could you please explain this to me? In most of the questions we only take the equity value.
I would be thankful for the prompt reply since the exam is in 5 days.
Joanna
Also, when ungearing and regearing the asset betas those values are used as if they are equity – it is the only such example in the past papers I found and I can’t get an understanding.
The question asks you to use the FCFF approach. Any increase in the value to the firm (after the premium payable to Fodder’s shareholders) must go to the shareholders – debt lenders do not get any benefit.
As far as the betas are concerned, the individual asset betas are calculated using the gearing for each of the companies. When calculating the overall asset beta we take the weighted average using the value of each business (as explained in my free lectures).
Sir John,
I understand that – but the answer gives FCFF without debt deduction – when looking at exc. VOGEL 2014, FCFF is also used but the debt is deducted before arriving at the final value to the shareholders. Could you please explain where does the difference come from?
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