I was under the assumption that FCFF is always higher than FCFE since the FCFF is the cash available after all your investments, and then debt holders are paid off and then the remainder goes to equity holders as FCFE. However, I was also under the impression that the value of the firm is identical (in theory) under both FCFF and FCFE calculations. This makes sense because of the different discount rates which make up for the FCFF and FCFE being different values. BUT, look at the formulas. FCFF/WACC = Value FCFE/r = Value If my statement in paragprah 1 is true, then the numerator in the Value under FCFF is higher. And we all know that WACC is less than r. Therefore, in FCFF/WACC, the numerator is higher and the denominator is lower, meaning that this will provide a higher firm value. This however conflicts with my second paragprah. Any help?
the show NY Wrote: ------------------------------------------------------- > I was under the assumption that FCFF is always > higher than FCFE since the FCFF is the cash > available after all your investments, and then > debt holders are paid off and then the remainder > goes to equity holders as FCFE. > > However, I was also under the impression that the > value of the firm is identical (in theory) under > both FCFF and FCFE calculations. This makes sense > because of the different discount rates which make > up for the FCFF and FCFE being different values. > > > BUT, look at the formulas. > FCFF/WACC = Value > FCFE/r = Value > > > If my statement in paragprah 1 is true, then the > numerator in the Value under FCFF is higher. And > we all know that WACC is less than r. Therefore, > in FCFF/WACC, the numerator is higher and the > denominator is lower, meaning that this will > provide a higher firm value. This however > conflicts with my second paragprah. > > Any help? FCFF/WACC measures the value of the firm in terms of debt and equity. In order to get it to measure the value of equity (FCFE/r) you need to subtract debt so that: FCFF/WACC - Debt = FEFE/r = Equity value of the firm Hope this helps, TheChad
so what youre saying is fcff/wac does NOT equal fcfe/r, BUT if you do fcff/wacc and subract the market value of debt, your answer should equal the same value for equity as if you did fcfe/r? thanks chad.
exactly. No problem 
but this is not the case, they are Equal, just try Subtract debt from FCFF/Wacc, the result will not Equal FCFE/r !!!
amrcd1 Wrote: ------------------------------------------------------- > but this is not the case, they are Equal, just try > Subtract debt from FCFF/Wacc, the result will not > Equal FCFE/r !!! I forget what the assumption was to make sure that this worked, but I believe it is that the cost of debt used in the WACC is equal to the interest rate used to calculate interest expense on the income statement, otherwise they will be different. When I get home today I will look for the reference in the text to point you down the right path. Best, TheChad
so is it true or false that fcff is always higher than fcfe?
No: FCFF = FCFE + Int(1 - t) + Net Borrowing So if you pay down a lot of debt in a period, your net borrowing is going to be negative causing your FCFE to be higher than FCFF. Best, TheChad
TheChad Wrote: ------------------------------------------------------- > No: > > FCFF = FCFE + Int(1 - t) + Net Borrowing > > So if you pay down a lot of debt in a period, your > net borrowing is going to be negative causing your > FCFE to be higher than FCFF. > > Best, > TheChad this is not always the case
Whoa FCFE = FCFF - Int(1-t) + Net borrowing FCFF = FCFE + int(1-t) - Net borrowing Do I have this mixed up?
FCFE = FCFF - Int(1-t) + Net Borrowing is the right equation and as to the answer for this question: It definitely says this in the book: Usually FCFE is less than FCFF. If FCFE exceeds FCFF it is because Net Borrowing is Positive (Large amount of Net Borrowing).
OK but after all the fair value of the stock under both methods will never be the same
sorry I had it mixed up…I meant what cpk said 
Best, TheChad