FCFE and terminal value?


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?

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Comments (9)

Jan 22, 2017 - 2:12pm

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?"

  1. Why wouldn't the FCFE change? During a refi there's a net borrowing, and dividends aren't factored in the FCFEs (otherwise you'd be double counting), so it should be affected. In other words, it won't affect the FIRM value (FCFF), but it does affect equity value (FCFE)
Jan 22, 2017 - 4:16pm
  1. TEVs apply to the whole firm. refer to my other post. as for your specific question, if you get cash from somewhere and didn't pay your debts yet then guess what's next ? pay what you owe !
  2. refi usually means raising debt equivalent to the one i have left to get rid of it and install a new one because :
    interest rates are now lower and i want to benefit from that
    previous facility is near maturity and i'm far from being able to service the consequent bullet payment thus i need new debt in order to lengthen the maturity.
    and in this case FCFF will not change just like EV. FCFE might change depending the new interest rates/amortization.
Best Response
Jan 23, 2017 - 9:57am
  1. 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)

  2. 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?

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Jan 23, 2017 - 3:25pm

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