Which BS accounts to remove from firm value to get equity value? (S2000 please help! We're confused!)

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Rukus520

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Equity Value = FCFF * (1+g) / (wacc - g) - Total Debt
In this case, is Total Debt all interest bearing debt, Total Liabilities or something else?
More specifically, which BS accounts are included in Total Debt? LT Debt, Notes Payable, (AP?), (others?)
 
When you calculate value of equity from FCFF deduct LTD, STD, N/P and A/P (means everything which is a liability).
When you calculate value of equity using EV then only LTD applies.
Can someone confirm this? I am 90% sure.
 
ah I had the same question, it killed me in the afternoon mock. I am shocked to see that you can just subtract especially when the denominators are different (wacc vs req on eq.. kind of boggles my mind.
 
Hey Kobi,
I think you are slighlty incorrect on that.
Some companies treat debt on their balance sheet as Notes payable since Notes payale is a similiar instrument. Accounts payable is considered more of an operating liability rather than straight debt.
With EV you definitely want to take out the market value of all your debt.
I believe for FCFF you want to use the market value also.
In either case you do not include A/P but you do include all debt including short and notes payable.
 
I bet you I’ve done some CFAI mock in which all liabilities (LTD, STD, A/P) were deducted from FCFF and only LTD was used in EV.
I have it in my hand-made notes so I didn’t take it from the sky.
 
You do not deduct A/P because A/P is a working capital item. It is already included in the change in working capital portion of the FCF equation.
Also the definitions in the books state market value of all debt. They do not single out long-term debt. Multiple internet definitions also show that short-term debt is included as well.
EV is considered to be the total take over cost. By not including short-term debt, you wouldn’t be factoring in the total cost of extinguishing all the companies debt.
 
It could be that the problem you saw on the exam didn’t have any short-term debt items, but in fact had a “portion of long-term debt currently due.” Many companies use this line item as well
 
I agree with Swhip… I have subracted everything except A/P->in my notes it says everything that is interest bearing debt you subtract out to get equity value. I would think in the real world pension lib should be included too.
 
Generally, “total debt” means interest-bearing debt, which would include PBO, but not accounts payable, wages payable, DTLs, and so on.
That seems reasonable in this context, but, in all honesty, because I don’t have a copy of the curriculum, I cannot say for certain that that’s CFA Institute’s take on it. For what it’s worth, that’s what I’d use on the exam.
(Disclaimer: I’m not taking the exam, thank goodness!)
 
I just took the 2012 CFAI mock and it had a problem or two in the afternoon item set I believe that included accouts payable. I looked at it and based upon my experience, I was like, that’s just wrong. As far as I know you exclude accounts payable and only include interest bearing debt such as long term debt, current portion of long term debt, notes payable.
 
waterbucket wrote:
I just took the 2012 CFAI mock and it had a problem or two in the afternoon item set I believe that included accouts payable. I looked at it and based upon my experience, I was like, that’s just wrong. As far as I know you exclude accounts payable and only include interest bearing debt such as long term debt, current portion of long term debt, notes payable.
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agree.
when you subtract Liabilities from Firm value to arrive @ equity value, u subtract interest bearing debts i.e. LT - ST debt (ST debts incl. notes payable current portion of LT debt)
 
waterbucket wrote:
I just took the 2012 CFAI mock and it had a problem or two in the afternoon item set I believe that included accouts payable. I looked at it and based upon my experience, I was like, that’s just wrong. As far as I know you exclude accounts payable and only include interest bearing debt such as long term debt, current portion of long term debt, notes payable.
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I do not see the question you are talking about in regards to FCFF subtracting out a/p (outside of the change of working capital investment). If you could point me to it that would be awesome. Thanks
 
SWhip wrote:
waterbucket wrote:
I just took the 2012 CFAI mock and it had a problem or two in the afternoon item set I believe that included accouts payable. I looked at it and based upon my experience, I was like, that’s just wrong. As far as I know you exclude accounts payable and only include interest bearing debt such as long term debt, current portion of long term debt, notes payable.
Click to expand...
I do not see the question you are talking about in regards to FCFF subtracting out a/p (outside of the change of working capital investment). If you could point me to it that would be awesome. Thanks
Click to expand...
I was referring to a question that DIDNT subtract out accounts payable. I believe it was in the 2012 mock, can’t remember whether its morning or afternoon.
 
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