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Hi John,
To discount free cash flows to entity WACc is used and for finding that of equity ungeared cost of equity is used, am I right on this one?
Thank you ?
Not quite.
Discounting the free cash flows to the firm at the WACC gives the total value of the firm (equity plus debt).
Discounting the free cash flows to equity at the cost of equity gives the value of the equity.
(Discounting at the ungeared cost of equity is relevant when calculating the adjusted present value)
In the Pursuit Co (June 11 A) they have calculated the free cash flows to the firm using WACC, but they why haven’t they subtracted the value of debt to find the value of the company?
The value of the company as a whole is equity plus long-term debt.
You would subtract the value of the debt if it was just the equity that you wanted the value of.
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