Question

If a company's capital structure has equity , debt and preferred stock, would you add the preferred stock to get from the implied enterprise value to the implied equity value in a DCF analysis? And explain it.

a. Yes, always, because Preferred Stock is a part of Enterprise Value.

b) Only if you are not counting Preferred Dividends in the FCF projections.

c) You never “add” Preferred Stock to go from Enterprise Value to Equity Value – you subtract it, and only if FCF excludes Preferred Dividends.

Answer 1

Question

If a company's capital structure has equity , debt and preferred stock, would you add the preferred stock to get from the implied enterprise value to the implied equity value in a DCF analysis? And explain it.

Answer :

c) You never “add” Preferred Stock to go from Enterprise Value to Equity Value – you subtract it, and only if FCF excludes Preferred Dividends.

In Discounted FCF caluclation method the firm value is calculated by discounting FCF by appropriate discount rate to arrive at present value of firm. This firm value is includes debt, preferred stock and equity. To derive the equity value we subtract the preferred stock and debt value form firm value.