ACCA Strategic Professional · Advanced Financial Management · Valuation and the use of free cash flows
A company's FCFF is expected to be $24m next year, growing at 3% a year indefinitely. Its WACC is 9%. It has debt with a market value of $100m. What is the value of equity using the FCFF approach?
Equity value is $300m. Enterprise value is next year's FCFF of $24m divided by WACC less growth, 9% minus 3%, giving $400m. Deducting the $100m market value of debt leaves $300m for shareholders. Forgetting to deduct debt would overstate equity.
- A$300m
- B$400m
- C$200mCorrect
- D$289m
Explanation
Firm value = 24 / (0.09 - 0.03) = 400. Equity = 400 - 100 = 300. The correct figure is therefore $300m. Option $400m ignores the deduction of debt, and $200m is wrong because it subtracts too much.
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