Question

why are equity values derived from FCFF and FCFE approaches different for the same firm?

Answer 1

FCFF measures the cash avaiable for Both Equity and Debt investors on any firm, FCFE measures the cash avaiable only to Equity holders after all debt obligations are paid

Answer 2

Thanks marcelo but my question is different. I understand the broad investor base that FCFF and FCFE are available to, but my question is: say for firm A, we derive FCFF and arrive at an Enterprise value after a DCF. Then Equity value= Enterprise value+Net Debt= $X ( broadly speaking). Again, if we start from FCFE, we can discount that with the Cost of Equity and arrive directly at Equity value=$Y. Notice that $X from the FCFF approach and $Y from the FCFE approach will usually be different. My question pertains to why that is the case?

Answer 3

You should look at the differences between FCFF and FCFE to answer this question.
The most obvious difference is that in FCFF you have to deduct the MV(Debt); if you miscalculate it then both equity values will be different.The second difference comes from calculating the growth rates, you have to make the same assumptions in order to get a consistent growth rate between the two methods.
To be able to get the same equity value you're going to have to do a lot of trial-and-error.
I hope this help you, good luck.

Answer 4

In theory they should be equal. But if you are modelling in excel, most likely they will not match. Its a technical problem, and the only way to solve it is enabling the "recalculation" option but this can be quite messy if you accidentally break it.