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Hello,
Can you please explain how to check if in the free cash flow valuation obtained it is included the value of the debt and equity or just the equity? Obviously if the question says that it is free cash flow to equity then our valuation will include only equity. But what about the case when the question says “here are the free cash flow estimation”? We assume that our valuation includes also debt? In a question from BBP revision kit the directors had to decide whether an offer of 10m for shares is better than the value of the company obatined using free cash flow estimation and i have made the assumption that our valuation included debt but they did not. So i have estimated the value of equity by deducting from valuation the mv of debt and my answear was wrong.
Thank you!Hi,
I have a feeling I did this question a little while ago.
If i remember correctly they end up paying off all the debt with the merger (something along those lines) so the company is 100% equity financed. Therefore the cash flow can only go to the equity holders (as there is no debt providers)
I could be wrong, give the question a re-read and look out for a comment on repaying the debt.
Just passing though and though I may be able to help
Discounting the free cash flow to equity at the cost of equity gives the value of the equity.
Discounting the free cash flow to the firm at the WACC gives the value of the business (equity + debt).
I can’t comment on the BPP question unless you tell me which it is 🙂
Thank you for your answer. It is the question 1 from Mock exam 1 from latest BBP exam kit. The WACC is used to discount the cash flows. Maybe it is an error in their answer as valuation should include debt also.
Question 1 in Mock Exam 1 is called Daron, and in this question you are asked to calculate the NPV for part (a) (i), and so discounting the free cash flows at the WACC is correct.
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