Question

How we do derive at the Equity Value from Firm Value? Lets say, Firm value is $500m, net debt is $5m, cash and eqv, $30m? I am thinking along the lines of $500 - $5 + $30 = $525m? Am i right?

Answer 1

FCFE (Free Cash Flow to Equity)= FCFF(Free Cash Flow to Firm) +Net borrowing - Int exp (1-t)
500+5=515

Answer 2

I am sorry i mistyped, net debt is not $5, total debt is $5m.

Answer 3

Also, what should be included in total debt? Should short term payable be in net debt? or am i double counting since i already included it in my FCFF?

Answer 4

Are you sure that this is the only information given to you? I feel there's more.

Answer 5

That is the only information given.

Answer 6

Ah sorry my fault, it's the Firm Value minus the interest bearing debt.

Answer 7

So should i add in the cash ? or just subtract the interest bearing debt to get my Equity value?

Answer 8

The cash is already added to the firm value. If it's not then add it, don't double count.

Answer 9

The cash isnt added to the firm value yet.

Anyway thanks for the help and i appreciate your effort spent in helping me :) Cheers! Enjoy your day.

Answer 10

I've got an additional question.

To calculate FCFE = FCF - Interest expense - principal repayment + debt issued.


If new common stocks are issued, should it be added to FCFE? Since money is injected into company. (Similar to what issuing debt is doing)!

Thanks!

Answer 11

The issuing of shares don't affect FCFE but it affects your cash amount.

Answer 12

Thanks, Btw brulee, ive got another question to ask regarding valuation.

Should i include acquisition into capex? My sense tells me i should. lol

Answer 13

Yes, mergers and aquisitions; but you should substract the depreciation of them if any.

Answer 14

Hey BruLee, i have another question to consult you with.

When finding the return on capital (ROC), the formula is EBIT (1-T)/ (BV of debt + BV of equity - cash) . I mean curious as to which year of bv of debt should i use? SHould i use current year of BV, or previous year of BV?

Answer 15

The year that you have the annual report for.

Answer 16

All of your information should be used from the same annual report and the most recent one.

Answer 17

So, if i have the 2010 annual report, and 3rd quater 2011 report, should i use the 2010 annual report? Or the updated 2011 report. I am guessing its the 2011 since its the most recent one

Answer 18

You should use the 2010 annual report but there are some numbers that should be updated to the third quarter. Search Damodaran's website on how to do it. The EBIT for example should be updated to reflect the third quarter since you are valuing the company in the third quarter.

Answer 19

Thanks for your help.

So BV of equity/cash/debt should be used for 2010 annual report, while the EBIT should be 2011 (trailer 12 months) ?

I have actually been reading Damodaran's website diligently for the past few weeks, however i cant seem to find where he says which BV of equit/cash/debt to use (except in glossary). But hey, i would keep trying and search that website (very informative), never know what else i would discover :D

once again, i really appreciate your help, time and effort. :)