- This topic has 3 replies, 2 voices, and was last updated 7 months ago by
.
- Posts
Hi, when calculating the market value of the firm we take the before interest cashflows in order find the net cash for the finance provider(debt and equtiy) however if we discount this wouldnt it strip way the intrest payment therefore leaves us with cashflow for the equity holders only.
2. Since we are valuing our accuqisiton what is the difference in the purpose to finding the market value of the business oppose to market value of the equity.
Thank you John In advance1. For the market value of the firm (i.e. the total of equity plus debt) we take the cash available before interest and discount at the WACC, as you have written. For the market value of equity we take the cash available for equity (I.e. after interest) and discount at the cost of equity.
I do explain this in my free lectures.2. Which is the more relevant approach depends on whether the acquiring firm is taking over the whole business (including the debt) or just the equity (coupled obviously with the requirements of the question in the exam).
I did go through the lectures but I have a hard time understanding the point if I were to discount the relevant cashflow to all finance holders wouldn that stripoff the intrest and wed have net casshflow to equity holders
- You must be logged in to reply to this topic.