Net working capital + net fixed assets = book value of long term debt + book value of equity, why?

CFA Level II
#1
  1. In the Residual Income Chapter

total capital ( Invested Capital )=

Net working capital + net fixed assets = book value of long term debt + book value of equity, why?

  1. Based on the explanation for ROIC in the Equity CFA book on page 165,

invested capital= cash, cash equivalents + working capital requriement + net fixed asset

Why the definition for the invested capital different for these two situations? Do we have to memorize both of the formulas?

Thanks!

#2

anyone?

#3

There is no single formula. Whatever different versions you find compile them and remember them because different item sets may provide different formats of balance sheet.

#4

This is a piece I dont really like but guess we dont have many options.

Do you mind explaining a little why the equation below is equal to each other? What do working capital and fixed assets have something to do with the euqity and debt? Thanks!

Net working capital + net fixed assets = book value of long term debt + book value of equity

#5

#1 is just rearranging the basic accounting equation of: Assets = Liabilities + Equity. It assumes a simple Balance Sheet (no intangibles, goodwill, or anything that doesn’t fit in the simple buckets). #2 is something someone came up with for their analysis. “Invested Capital” could be defined many ways. Look st Note 4 at the bottom of p. 165. I personally don’t plan on memorizing one specific definition of something so flexible. The idea is simply that the business is employing assets/capital to generate earnings. So how do you measure the effectiveness?

#6

You are amazing! It feels so good to figure this out. Thanks for your help!