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Suppose an analyst estimates equity value by discounting free cash flow to equity (FCFE) at the weighted average cost of capital (WACC) in the FCFE
Suppose an analyst estimates equity value by discounting free cash flow to equity (FCFE) at the weighted average cost of capital (WACC) in the FCFE model and estimates firm and equity value by discounting free cash flow to the firm (FCFF) at the required return on equity in the FCFF model. The analyst would most likely: overestimate equity value with the FCFE model and underestimate firm value and equity value with the FCFF model. Explain why?
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