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Study Session 7: Financial Reporting and Analysis: Income Statements, Balance Sheets and Cash Flow Statements

FCF vs. FCFE vs. FCFF

Hi,

the difference between free cash flow (FCF) and free cash flow to equity (FCFE) is not quite clear to me. The formula for calculating FCF is: CF from operating activities - CF from investing activities. Within the calculation, the interest payments to the lenders are already included in the income statement and thus in the net income for the year. The free cash flow is therefore available to the equity investors and can be used in the next period, for example, to pay out dividends, repay debts or for investments. Am I getting it right so far?

FCFF Formula

I am trying to understand below:

FCFF = NI + NCC + [Int * (1 - t)] + FCInv - WCInv

but come across one thing which I do not really understand. What does [Int * (1 - t)] mean in this context? I understand that it’s interest expense but why multiply it with the non-tax rates?

Thanks in advance for your help.

Diluted EPS

Ajax Company’s capital structure was as follows:

                                              12.31.04                  12.31.03

Shares outstanding:          

Common                               200,000                  200,000

Convertible preferred              5,000                    5,000

6% Convertible Bonds           $500,000               $500,000

Cost of Net Debt Confusion

Noticing on the Group Danone Consolidated Income Statement (CFA Vol. 3 p.95, PDF p.111) that cost of net debt doesn’t factor into net income. Am I missing something here?

Free Cash Flow to the Firm FCFF

Why only Fixed Capital investment is deducted from CFO to arrive at FCFF? Why CFI is not deducted? CFI also includes cash flows and will have an impact on how much Free cash is available to the firm?

R and D treatement IFRS v GAAP

My understanding is:

IFRS, research is expensed as incurred, development can be capitalized once technological feasibility has been established.

Gaap, research and development is expensed as incurred.

Do I have it down?

depreciation

1- ” If the asset is expected to have no residual value, the DB method will never fully depreciate it, so the DB method is
typically changed to straight-line at some point in the asset’s life”

this sentence is quoted form schewezer, can someone explain it by a numerical example?

2- is there any difference between Accelerated depreciation and DDM?

if yes provide an example plz.