another mock - FCFE question

In computing free cash flow to equity, adjustment is needed for payments made to which of the following capital providers? debt holders / preferred stock holders… 1. no/no 2.yes/yes 4.yes/no

FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment 4.yes/no


FCFE = CFO - capex + net borrowings - fixed costs 1?

FCFE=CFO-CapEx+netDebt i’m not sure the “adjustment” that is being inquired… taxes? additions, retirement? this question got me. id say 4) yes, no change in debt positions are adjusted (amortization, retirement, etc) preferred stock is a cash expense so no adjustment just a shot in the dark

No I think its very poorly worded. Question says, adjustment —> but does not specify adjustment to what ? CFO, NI or national GDP ? based on the feedback answer should be yes/yes

oh well. I think they are looking it as a very simple way saying that FCFE is any cash that goes to equity after everyone else have been paid off.

but pepp, where do we do adjustment for preferred stock holder’s in the following equation , FCFE=CFO-CapEx+netDebt I thought preffered equity is included in FCFE ???


You don’t have to pay preferred dividends. Interest on debt you need to pay or you will be legally bankrupt.

CFAI says “free cash flow to equity is after subtracting payments to both debt holders and preferred stock holders” this leads me to believe (2) yes, yes is the answer