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Hello Mr Moffat,
Hope you are fine.I have some questions about free cash flow method for the valuation of the comapny!
1- What is the difference between “free cash flow” and “free cash flow to equity” method?!! they are the same ???Also as far as I know we should NOT deduct interest in FCF approach. If I am correct then would you please let me know :
2 – Why we have such a rule ?! I mean what is the logic for not deducting the interest ?
3 – Why in the December 2009,Question 1, part a, the interest is deducted in the FCF calculations??!Kind Regards
Thank you in advanceFree cash flow is the cash available for al providers of finance (and so before interest).
(If we are valuing an investment or a business then this would be discounted at the WACC – the overall cost of all finance)Free cash flow to equity is the cash available for shareholders and is therefore after interest.
(If we were valuing the we would discount this at the cost of equity).I assume you are asking about the question Kodiak. Assuming you are, then part (a) specifically asks for the FCFE !
Hello Mr Moffat,
Thank you for you your reply.Excuse me I am a little confused yet.
Would you please confirm whether it is correct to say :We can determine the value the entity by two ways :
1 – Free cash flow techniques (FCF) :
– It is BEFORE interest
– We should use cost of capital for discounting2 – Free cash flow to equity techniques (FCFE) :
– It is AFTER interest
– We should use cost of equity for discountingAnd the question usually says what technique should be used? FCF or FCFE (I mean there is to tricky point about which one should be used and it depends on what technique examiner wants. )
Correct ?!!!!
Thank you for your help.
Kind RegardsWhat you have written is correct 🙂
And yes – the question will state which one he wants (If ever he didn’t then you would state your assumption and that would be OK).
Hello Mr Moffat,
Hope you are fine.
My question is about the calculation of tax in FCF & FCFE when we have interest.
I know that in FCFE we should deduct the interest and in FCF we should NOT deduct the interest. But my question is why we do NOT deduct interest in FCF for calculation of the tax?I mean when it is FCFE
1 – first we should deduct the interest in order to calculate the PBT,
2- then we calculate and deduct the tax,But when it is the FCF method I believe that we should do:
1 – first we should deduct the interest in order to calculate the PBT,
2- then we calculate and deduct the tax,
3- Add back the interest.But ACCA answer for FCF says something like:
1- first we should calculate the PBT (ignoring any interest),
2- then we calculate and deduct the tax.So my question is :
1 – Is it correct to say interest has no effect on tax calculation in FCF method?
2 – If yes, why ?Thank you in advance
Kind RegardsIn calculating the free cash flow we ignore both the interest and the tax saving on the interest (just as we do in Paper F9 and P4 normal project appraisal which is effectively looking at the free cash flow).
The reason is that the interest (and the tax saving on it) is dealt with by the discounting. We discount at the WACC and in the calculation of it is included the after-tax cost of the interest. To bring either the interest or the tax saving on it into the cash flows, but effectively be dealing with it twice.
When we use FCFE, we should use Cost of equity to discount, this means we should use Cost of ungeared equity or WACC, pls advise?
You use the actual cost of equity unless it is an APV question in which case you use the ungeared cost of equity.
Just want to clearer, that means, regardless we use FCFF or FCFE, we always use actual WACC to discount in NPV question, pls. advise?
Much thanks
No.
If we are using free cash flow to the firm then we discount at the WACC.
If we are using free cash flow to equity, then we discount at the cost of equity.
good day sir?’
when we are calculating the value of ordinary equity using the FCFF, and we are given the statement of cash flow, does this affect how we calculate our free cash flows and what we will be my starting point in this scenario?’thanks in advance, your answers are really helping
It depends what you mean by the statement of cash flow – i.e. the financial accounts statement, or the normal NPV statement of the cash flows each year.
I cannot give you a ‘standard’ rule because the layout of each question is different.
If you are looking at a specific past exam question or from the BPP Revision Kit, then tell me which one and then I can explain. (I assume you have watched my free lectures on this, and also there are some lectures working through past exam questions on this linked from Revision Kit Live on the main Paper AFM page.)
sir for this question in FCF to firm for foshoro, i am not getting the growth rate, i did
(91/83.3)^1/3-1 but im getting negative 0.6358
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