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Sir while calculating asset beta after implementing ,why the examiner has taken 50:50 ratio,i know it does mention that equity wont change but after paying 70% current liabilities wont the debt change,or is it because if equity is 50% then debt has to be 50%. Thanks
After implementing, the debt will change, and the examiners answer does use the changed value of debt ( he uses MVe of $42.614,000 and MVd of $12,808,000) to calculate the new equity beta.
Where he uses 50:50 is for calculating the asset beta in the first place. To calculate this, we take the current equity beta and use the current gearing. The current gearing is MVe $42,614,000 and MVd is $42,344,400, which is about 50:50.
Hi sir. For FCFE, are we not required to discount it to PV.
Also, why are the valuation methods different using FCF in business valuation and in. acquisition and merger.
I was expecting to use FCFE discounted at cost of equity or FCF discounted at WACC – Value of debt for this question.
However, in this qs, we are using simply FCF x g/1+g.I know this qs is silly. But I am very confused. Kindly help. I find so many methods of calculating value of company using FCF or FCFE. There is one with terminal value as well.
This question does not ask for a valuation of the business, but it is necessary to calculate the market value of the equity.
To do this the answer has discounted the free cash flow to equity (2,600) at the cost of equity (10.6%).
However, because it is a growing perpetuity, we use the dividend valuation formula to calculate the market value of equity in the normal way.
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