Home › Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA Advanced Financial Management (AFM) Exams › Do FCF to equity and firm give same value?
- January 16, 2020 at 10:32 am
Thank you sir.January 16, 2020 at 4:25 pm
FCF to equity is discounted at the cost of equity and gives the market value of the equity.
FCF to the firm is discounted at the WACC and gives the total value of the firm (i.e. equity + debt).January 17, 2020 at 4:18 am
Im sorry my question was wrong.
Do they give same equity value?January 17, 2020 at 7:31 am
Yes they would but usually in the exam you do not have enough information to be able to do it both ways.January 18, 2020 at 12:55 am
Thank you 🙂January 18, 2020 at 1:02 am
Oh sir one more question.
Why do i feel that FCF to equity gives much higher equity value than FCF to firm?
Only factor to be accounted in the FCF to equity is interest, discount factor and debt repayment.
If both gives same equity value, and since both begin with EBIT, it means interest payment and\or discounting factor is tremendeous to be able to be similar value to market value of debt in FCF to firm.January 18, 2020 at 7:07 am
The WACC will be lower than the cost of equity, and therefore although the cash flows to equity will be higher than the cash flows to the firm, they will be discounted at a higher rate.
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