FCFF x FCFE - firm value and EV

CFA Level II Equities
#1

All,

Quick question on FCFF vs FCFE. In p. 136 on Schweser book, they give us a formula: Equity value = Firm value - market value of debt.

I was wondering, what is the relation between market cap, enterprise value, equity value and firm value. My understanding is that EV = firm value. But usually to get to EV we depart from the market cap sum the market value of debt but we also SUBTRACT cash & cash equivalents, right?

Why this formula above does not account for subtracting cash?

Thanks

#2

The way I understand it, Firm Value and Enterprise Value are not necessarily the same thing. Basically, firm value represents total firm value (equity + debt), while enterprise value represents a firm’s “operating value”, thus the deduction for non-operating assets like cash.

Enterprise Value looks at a firm from the perspective of purchasing all of the firm’s equity and debt, or the net price an aquirer would pay for the firm. Any cash and short term investments received from an acquisition could be used to pay down debt, thus the deduction to come up with a “net” value/price.

#3

Can someone confirm that?

Thanks for the answer Jay.