Hi!
I'm trying to value a holding company that owns 3 projects, one of which has amortizing debt (changing leverage) for acquisition purposes. I'm fine with valuing the firm as a whole using FCFF and assuming it will be refinanced to a target D/E, but my questions are as follows:
1.- If I were to value the equity directly using FCFEs, how would I treat the terminal value (since the project is sold at an EBIT multiple after X years)? I'm guessing it's not going to be the same terminal value that I'm using for the firm as a whole, since there's debt.
2.- Again with the FCFE, since I'm refinancing the firm after acquisition, would the refinancing be a huge free cash flow to the equity, as there will be a net borrowing/principal repayment?
if you use FCFE then TV with a EMM must be a multiple of NI.
Refinancing is cash neutral, so FCFE would not change.
Questions: 1. I don't understand what you mean by that. The exit multiple is a multiple of EBIT because of the kind of project/firm I'm valuing. And in any case, my question was more like "Does the TV go directly towards FCFE? Or should I first repay all debt and see what's left?"
f you do FCFE then TV must be calculated from a multiple of an equity measure (NI) because this is an equity valuation.
You are raising debt and using the proceeds to pay off your debt so FCFE to equity should not change. There may be minor changes due to fees, different amortization schedule and different interest rate
That makes sense, but in this case I'm being told the firm is going to be sold at a X EBIT multiple. I have that factored in my firm valuation, but I'm trying to do an independent equity valuation as well (not EV - debt, but DCF of FCFE)
You're 100% right, but I didn't mention that the refinancing will change the capital structure as well, closer to the target D/E. Then 2 years later there's a substantial change in capital structure as well. So in these cases, where there is in fact a net borrowing, FCFEs change right?
as the other poster said. for your project which needs to be sold issue, you will have to treat that separately as a one-off event in the statements for the corresponding year and not into the valuation.
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