Schweser freaks me out sometime. What would be FCFE in this case
Net Income: 50
Change in Working Capital = 4
Capex = 65
Depreciation = 27
Net borrowing = 0
In addition, a piece of equipment was sold for $10 which had a book value of $2 at the time of sale. What will be FCFE.
The options are
A. $6
B. $10
C. $18
My calculations are FCFE = 50 + 27 - 4 - (65 - 10) = 18.
I am using Schweser formula of FCInv = Capex - Sale of equipment
In another formula Schweser says FCInv = Ending PP&E - Begining PP&E - Gain (+loss) on sale of equipment
Both of the formula sound good to me. But in this particula example they subtracted gain from the FCFE calculations above, which seems double counting to me. First, you are including sale of equipment in FCinv calculations (65-10) and then you are also subtracting gain of 8 from FCFE. Is this correct?
The equipment proceeds of 10 include the gain of 8. Since the net income figure already has the gain of 8 as well, you have to deduct it in the FCFE formula.
The gain on equipment is a non-cash item that appears in CFO. It needs to be subtracted because net income is higher as a result of its inclusion.
The equipment proceeds ($10 here) is that actual cash received from the sale that shows up in CFI.
Think of CapEx as Net Capex (Purchases - Sales) and the gain (loss) as an extraordinary item that needs to be backed out…unless they’re an equipment dealer, of course.
I love when cpk123 responds, he knows his stuff and I’ve never seen a post of his that hasn’t been helpful (I’m saying him/his because I can only assume that his avatar is an accurate photograph).