I have attempted a valuation of a company which has been projected having staggered equity investments into it.
While doing the valuation the equity IRR works out to about 17% however the NPV works out to a value less than the total equity inflow...
ie say the total equity inflow is 1000 over a period of time the NPV works out to just 500
could some one let me know why this happens...
the prospect firm is in the starting phase and presently all figures are just projected... hence at this point of time there is no cash balance or debit availed.
in this case shouldnt FCFF be equal to FCFE
I want to value the present value per share
regards
Bookmark/Search this post with:
Are you doing your valuation
Are you doing your valuation based on the DCF when u calculate ur IRR?
There is nothing wrong with
There is nothing wrong with that. NPV should be calculated as pv of return AFTER subtracting initial investments, and thus NPV less than equity investment signifies nothing. The fact that NPV is positive and equity IRR is positive is logical - whether those numbers are correct will depend on your model, but conceptually, there is nothing wrong.
As for FCFE and FCFF, yes they should be the same if there has been / will not be any debt. However, even with projections, you may want to make assumptions as to their future capital structure to capture potential tax shields.
In theory
NPV should be the same in a FCFF and FCFE situation as well, though. Not sure if this is what you were asking, but:
Sum of FCFF/Cost of Capital
should be equal to:
Sum of FCFE/Cost of Equity
That's pure theory base. Plenty of reasons (some from the accounting statements) as to why this doesn't work out in practice.