Hi John
In this queston part (b)(i), they have reduced the entire variable loan of $6500 from the overall value of Nente Co to derive at the Total equity value.
But isn't FCFE = FCF - debt int - debt repayment + cash from new debt raised.
Here they don't tell if Nente is repaying the entire loan, so why have they reduced that amount.
Ask the Tutor ACCA AFM
Nente Co (Jun 12 Adapted)
4y ago#1It is not because they are repaying the loan.
Discounting the free cash flows (before interest) at the WACC gives the value of the company (equity plus debt). Subtracting the debt from the value of the company gives the value of the equity.
So FCF using WACC gives Total Value of the company, i.e. equity + debt
And Discounting FCF-int-repayment using Ke gives Value of equity only
Is my understanding right?
4y ago#3Yes - your understanding is correct :-)
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