When to subtract Market value of debt from FCFF/FCFE

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1030trader

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Hey guys! I noticed that I’ve been making mistakes in questions with regards to FCFF and FCFE cause I usually forgot to subtract the market value of debt to get equity value.
When is it appropriate to subtract market value of debt when arriving at FCFF/FCFE? Are there specific keywords that I’d need to look at in the phrasing of the question/the given data? I noticed that it doesn’t need to be subtracted when the formula is FCFE = NI - [(1 - DR) x (FCInv - Dep)] - [(1 - DR) x WCInv]
 
FCFE goes to equity holders, FCFF goes to holders of all securities incl. debt of the company.
If you discount all future FCFEs, you have equity value. If you discount all future FCFFs, you have firm value. To get from firm value to equity value, you need to deduct the market value of debt.
 
In the abovementioned formula the value of the equity is found straightforward, so no need to substract the MV of the debt.
If you calculate the value of the firm (using FCFF) then you have to substract the market value of the debt in order to find the value of the equity.
Just be careful what you have and what you are trying to calculate - value of the firm vs equity.
 
Thanks guys!! Really big help. What I noticed what that I’d forget to subtract MV of debt from FCFF when looking for the “per share equity value”.
 
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