Equity Valuation: Free Cash Flow Valuation

Question 1

Free Cash Flow to the Firm (FCFF)

Answer 1

FCFF = NI + NCC + int(1-Tr) - FCInv - WCInv

Question 2

Free Cash Flow to Equity (FCFE)

Answer 2

FFCE = NI + NCC - FCInv - WCInv + Net Borrowing

Question 3

FCFF Valution to Estimate Firm Value / Equity Value

Answer 3

Firm Value = ∑ FCFFt / (1+WACC)^t

Equity Value = Firm Value - MVdebt

Question 4

WACC based on MV of Debt and Equity

Answer 4

WACC = (MVdebt / MVdebt+MVeq)(Rd)(1-Tr) + (MVeq / MVdebt+MVeq)(Re)

Question 5

FCFE Valuation to Estimate Firm Value (constant growth rate)

Answer 5

Firm Value = FCFF1 / WACC-G

or

Firm Value = FCFFo(1+G) / WACC-G

Question 6

Value of Equity using FCFE

1. No Growth
2. Constant Growth

Answer 6

Ve = ∑ FCFEt / (1+r)^t

Ve = FCFE1 / r-G

Question 7

Two Stage FCFF Valuation Model

Answer 7

2-stage FCFF = ∑FCFFt/(1+WACC)^t + (FCFFn+1)(1) / (WACC-G)(1+WACC)^n

Question 8

Two Stage FCFE Valuation Model

Answer 8

Ve = ∑FCFEt / (1+r)^t + (FCFEn+1)(1) / (r-G)(1+r)^n