FCFE Calculation - Why do we include cash in WC?
I’m struggling with question 13 in reading 31 “Free Cash Flow Valuation”. In the problem we are asked to calculate FCFE. My question revolves around why we include cash in the working capital calculation.
The problem clearly states that current assets include $5m in cash (in parentheses), and the $5m is not stripped out when we calculate WC (as equal to the change in current assets - change in current liabilities). I.e. we end up with WC = $41 and not $41 - $5 in cash.
However, it also clearly states in the readings that WC is “defined to exclude cash and short term debt” in section 3.1 that’s titled ”Computing FCFF from Net Income”.
If anyone can shed any light, I would be most appreciative!
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