Third, it’s essential to note that expression (14.1) does not yield the value of the company’s equity but the value of the equity plus debt. Note that the CFCFs we’re discounting are those that could be distributed to shareholders and debt holders; therefore, the present value we’re calculating is that of equity and debt. The important implication of this is that after arriving at an estimate of the value of the company using expression (14.1), to estimate the value of the company’s equity we need to subtract the market value of the long-term debt outstanding. To drive this point home, think that if ...
- 14 Stocks II: The WACC model
- from The Financial Times Guide to Understanding Finance, 2nd Edition
- Publisher: Pearson Business
- Released: May 2011
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