Question

Why is the rate used to discount FCFF different from the rate used to discount FCFE?

Answer #1

Rate which is used to discount free cash flows to the firm will be different to rate which isused to discount free cash flow to equity because free cash flow to firm will be representing the free cash flow which is available to the debt holder as well as preferred shareholder as well as equity shareholders, so there would be a cumulative cost of capital that should be used to discount the free cash flow which is available to the firm.

free cash flow to the equity will be representing the portion of ownership of equity share holder and hence we will be using cost of equity in order to discount free cash flows to the equity so there is a a difference in both the approaches of valuation while selection of discounting rate due to their nature of used by different stakeholders.

Explain how the company's definition and calculation compares to
the comprehensive FCFF and FCFE. Also, explain how the third
party's definition and calculation compares to the comprehensive
FCFF and FCFE.

Mystery Inc generated FCFF of $2450 and FCFE of $2100 in the
most recent year. The firm will grow at a rate of 3% for the
forseeable future. The book value and market value of MakeUp's debt
are $19000 and $17,000, respectively. The firm's WACC is 9% and the
firm's tax rate is 34%. Which of the following is closest to the
value of the equity stake in the firm? Round your answer to the
nearest $1000.
$24,000
$23,000
$35000...

Zoom Enterprises has FCFF of 700 million Swiss francs (CHF) and
FCFE of CHF620 million. Zoom’s before-tax cost of debt is 5.7
percent, and its required rate of return for equity is 11.8
percent. The company expects a target capital structure consisting
of 20 percent debt financing and 80 percent equity financing. The
tax rate is 33.33 percent, and FCFF is expected to grow forever at
5.0 percent. Zoom Enterprises has debt outstanding with a market
value of CHF2.2 billion...

The most appropriate discount rate to use when applying a FCFE
valuation model is the:
Select one:
a. WACC
b. Risk-free rate
c. Required rate of return on equity or risk-free rate depending
on the debt level of the firm
d. Cost of Debt
e. Cost of Equity

Discuss the similarities and differences between using FCFF
(Free Cash Flow to the Firm) versus using FCFE (Free Cash Flow to
Equity). When might one approach be preferred over the other? Be
sure to discuss the proper discount rate to use for each approach
as well.

How would the discount rate used to evaluate a replacement or
repair project, such as a leaky roof, be different from the
discount rate for an investment in a new product or service? Why
would the discount rates differ?

why is it incorrect to use the same discount rate for
different sectors of investment?

Why is net borrowings added to the FCFE equation?

2) You are given the following information for CareMed
Corp.:
2020 FCFE $8,000,000
FCFE growth, 2021 – 2024 6.6%
Constant growth in FCFE beyond 2024 5.0%
First dividend expected in year-end 2022 $2.25
Growth in dividend in 2023 and 2024 9%
Constant growth in dividend beyond 2024 8.6%
Shares outstanding 1,500,000
Beta coefficient 1.5
Risk-free rate 3.0%
Rate of return on the Market Portfolio 8.0%
a) What is the appropriate discount rate for CareMed’s
stock?
b) What is the intrinsic...

Why does the Net Present Value change depending on discount rate
being used?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 4 minutes ago

asked 50 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago