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Sir,
1. FCF of fugae co has been discounted using ROE and not WACC. Is this because it is FCF “to equity”?
2. Why hasnt call or put option be calculated for the option to sell the project by fugae co? I find this as option for abandon and it is put option. if SD was given, can we add this option?
3. Kaplan text book says
Free cash flow “to equity” is
Free cash flow less debt intrest and debt repayments, add cash raised from debt finance. Why hasnt this be considered in this qeustion? In which case do we use this?As I explain in my free lectures, the market value of equity is calculated by discounting the free cash flows to equity at the cost of equity (do not call it the return on equity).
The wording of part (c) of the question makes it clear that you are not required to value the option (and if you are ever required to value an option then the question always specifically asks for it and would have to give more information).
I don’t understand your third question. The question gives you the free cash flows to equity and these are therefore already before debt interest.
You can find lectures working through the whole of this question linked from the following page:
https://opentuition.com/acca/afm/afm-revision-lectures/- Topics: 51
- Replies: 52
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Thank you sir
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