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Hello sir,
I completely understood what the solution did to calculate equity value of the combined company
However, what I did was calculate Ke using asset beta= 9.6%
And then I discounted FCF with Ke (9.6%) to arrive at value of equityWhat they did was calculate WACC, and then using that to calculate whole company value and then taking 70% to arrive at value of equity (Which I understood)
Even though my FCF answer exactly matches with the solution, my value of equity is different by a big amount (> 2000m)
Again I understood the solution, but how am I wrong??Is it the case that I’m not wrong BUT since the question states the firm uses the FCF to firm method, I have to find FCF to firm and then deduct the debt value (which the examiner did)
Kindly advise
Thank youBecause the question does ask for the FCF to the firm approach, you do discount the free cash flows at the WACC to get the value of the firm, and then subtract the debt to get the value of equity.
Had it not said this, then the alternative would have been to discount the free cash flows to equity (i.e. after debt interest) at the cost of equity, so as to get the market value of equity.
Yeah correct..
We won’t be able to solve by my method since the nominal value of debt is not given right ? ( If it were we could have taken 5.3% on it to calculate the interest) Just asking for my knowledge purpose
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