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Good evening sir…
1. kindly let me know if the following summary is correct:
FCF to firm do not inlude interest and they are discounted at WACC
FCF to equity include interest and they are discounted at Ke calculated using asset beta2. this relates to q3 of the mar/jun 16 sample.
the answer in valuing Staple View, he uses post-tax cashflows to mean FCF to equity. does the term ‘post-tax cashflows’ imply interest has been deducted? (i think not). kindly clarify.
also, he uses 4% as a growth rate. but these rates refer to growth of the investments of NCA and WC. how does one justify using these rates to the growth of the cashflows??
regards
1. Correct
2. You would normally assume that reported post-tax profits are after interest.
With regard to the 4% growth, the fact that non-current assets and working capital are increasing at 4% “in order to support the expected sustainable increases in operating profit and cash flow” does suggest that the cashflows will increase at 4% as well (especially since there is no other information as to how to estimate the inflation).
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