Financial Modeling

Re: equity IRR

1) IRR question: As with any IRR calculation, your "Year 0" equity investment (equity injection) is your initial cash outflow. If this were a company (structure as an asset acquisition), your terminal value would be the Equity Value of your ownership stake in the company. Interim cash flows would b... Read More

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by WST Expert 1.

added 9 years ago

Re: equity IRR

Thanks. Ok. But how can we calculate an equity IRR from FCFF?

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by Kervin T.

added 9 years ago

Re: equity IRR

IRR is calculated based on actual cash flows (per financial model). FCFF is a valuation DCF metric, not for IRR. As such they are different concepts that are unrelated.

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by WST Expert 1.

added 9 years ago

Re: equity IRR

Hmm...but FCFF or FCFE can be derived from the financial model, right?

Assuming you model it rightly (perfect world), then projected FCFF and FCFE can be used to calculate Project IRR and Equity IRR respectively, right? (conceptually)

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by Kervin T.

added 9 years ago

Re: equity IRR

No, FCFF and FCFE (horribly) are for valuation, not IRR calculations.

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by WST Expert 1.

added 9 years ago

Re: equity IRR

Then what kind of "cashflows" do you use to calculate project IRR and equity IRR?

The context here is that we will buy and control 100% of the share. and we do not increase the debt excessively since there is bank financing covenant anyway to make sure that would not happen.

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by Kervin T.

added 9 years ago

Re: equity IRR

Once again, for IRR, calculations, they are always done on a cash-on-cash basis. FCFF and horribly, FCFE, are for DCF valuation and not true cash-on-cash. Your calculation would be similar to modeling out LBO returns - equity investment at time 0 (cash outflow), followed by any actual cash dividends... Read More

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by Hamilton L.

added 9 years ago

Re: equity IRR

Thank you. I got it. I guess its more of "labeling" since "cash dividends" is equal to "FCFE" in a scenario where controlling shareholders have access to it 100%.

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by Kervin T.

added 9 years ago

Re: equity IRR

Actually not really. Dividends are physically cash pay as opposed to FCFE which is still accrual concept of accounting. If you truly dividend out the exact calculation of FCFE, then yes, they are the same.

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by WST Expert 1.

added 9 years ago

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