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Piko co anticipates that after making number of changes Minnow co will generate free cash flow of $6m next year. This is expected to grow by 4% per year. WACC is 12% and Ke is 15%
Calculate market value of equity of Minnow co using DCF
Sir by using cost of equity we get solely the market value of equity but in this answer they again deducting the value of debt
I don’t get it
Pls help meThe free cash flow is the total available for both equity and debt (it is before interest) and discounting at the WACC then gives the total value of the business (including debt).
It is discounting the flows to shareholders (after interest) at the cost of equity, that gives the value of equity.
But here they are using ke not wacc
So this means if the cash flow are free by using ke we get the cash flows for both the equity and debt holders
But i still confuse with the using ke and the wacc
In this case if we use wacc rather ke we get a diffrent answerI have said already the free cash flow is the total available for both equity and debt (it is before interest) and discounting at the WACC then gives the total value of the business (including debt).
PV of future CFs discounted at the WACC = $6m × 1/(0.12 – 0.04) = $75m
However, this gives the value of equity + debt, so the value of the debt must be deducted as we are just asked to calculate the MV of equity.MV equity = $75m – $2.5m = $72.5m
So I have no idea what you are struggling with
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