US GAAP
FCFE = FCFF - Interest*(1-T) + Net Borrow
I’m a little confused as to how to calculate FCFE it was IFRS and they classified interest expense as a CFF and knowing FCFF= CFO - FCInv
Would FCFE simply be: FCFE = FCFF + Net Borrow ?
Appreciate the help.
I don’t think the accounting standards has something to do with the calculation of the FCFE. UNder US GAAP the interest expense is treated as a CFO, whereas under IFRS as either CFO or CFF.
You should rather concentrate on the cencept behind. FCF to equity excludes interest payments because this metric measures the income avaialble to equity shareholders. And interest expense belong the debt holders.
You can think about FCFE and FCFF like NI vs. EBIT, if it helps you. NI is used for efficiency metrics like RoE, while EBIT plays in the interest coverage ratio (EBIT/Int Exp)
Hi accounting standards do play a role I think ! - see the CFA presentation slides (powerpoint)
Really? Didn’t see any discussion about the accounting standards in the CFAI PPT for this chapter. I also read the chapter Free Cash Flow Valuation from the CFAI book and didn’t see any discussion about differences in the accounting standards when calculating FCF. At the end, you want to calculate what amount of money passed through the company/equity in a certain period of time; that cannot change if you use different accounting standards.
Here’s how my take; if I’m missing something somebody please jump in!
FCFF is by definition the free cash flow to the firm. What’s free is free no matter what accounting standards are used.
I would think that the only scenario where accounting standards could come into play would be if you were starting from CFO and moving to FCFF or FCFE, since you’d need to check that the IFRS company didn’t classify the interest expense as CFF. If so, if you calculated the CFO from the income statement using the indirect method, you should still be fine, assuming you don’t treat them differently. If, however, you simply glanced at the statement of cash flows and pulled the CFO numbers, you might need to decrease this by any interest expense that the IFRS company labeled as CFF. (So, reciprocally, you’d need to increase CFF if you wanted to use CFF for something and wanted to be economically sound).