It is possible to determine the equity value of the firm if you know the present value of free cash flow to the firm and the book value of the firm's outstanding shares.

Question

Quizplus · Accepted Answer

The equity value of a firm is typically determined by discounting the free cash flows to equity (not to the firm) at the cost of equity, or by subtracting the firm's debt from the total firm value (enterprise value), which is derived from discounting the free cash flows to the firm (FCFF) at the weighted average cost of capital (WACC). Knowing the book value of the firm's outstanding shares does not directly help in calculating the equity value from the present value of FCFF.

It Is Possible to Determine the Equity Value of the Firm