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Hi John,
In this question, the Free Cash Flow was discounted at all-equity cost of equity. The question is shouldn’t the FCF be discounted at WACC instead? It is cash flow available to both equity and debt holders so the WACC should be used.
And if WACC should be used, will this be calculated based on the equity and debt market value of Oberberg itself?
Finally, if I do my answer as provided by examiner, should I understand that the normal FCF can be discounted at cost of equity (the cost for an all equity financed firm), then we can take the tax relief from interests and discount at cost of debt to find the financing effect separately. Add these 2 values and we get the firm equity value?
Thank you
The question is asking for the APV. It specifically asks for the PV of the operating free cash flows (operating flows are before interest) discounted at an all-equity rate, and adjusted for other relevant flows – this is exactly what APV is !!
I explain APV in detail in my lectures.
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