# BSAS Q37 - AGAIN NWC!!!

Man this gets me everytime. My first question is where do they get the tax rate from?? Isn’t it just just the re-arrangement of (EBIT-int)(1-t) = NI? Secondly I messed up the NWC AGAIN… But I can’t see where I went wrong? SO the foruma is Ni + NCC … - NWC and NWC in this case is AR + INV - AP but INV and AP are both increases of the same ammount so cancel out. So that leaves AR. In this case AR DECREASES by 6000 so it should be -6000. Now subbing that into the FCFF equation it’s NI + NCC + … - (-6000) But it’s just -6000 in the answers… Can someone please explain where I am going wrong.

cash flow statement in page 21 change in AR (6000)+change in Inv (1000) + Change in AP +1000 = (6000)

I can’t believe I still can’t see the tax rate of 32.5%, where about is it on that page? so are these always absolute changes for NWC??

looks like it mambo. check out the CFAI mock PM. the cash flow statement has a decrease in NWC so they have added it in the CF. but in the FCFF calc, they have subtracted it as is the norm.

they have given you 3 periods of Income statement. 2006: 6700/21500=31.16% 2007: 6300/20000 = 31.5% 2008: 7400/23000 = 32.2% I believe there is an erratum that uses the 32.2%.

Increase in AR and Inv = Reduction in CFO INcrease in AP == Increase in CFO. Level I stuff, guys

http://www.bsas.org/BSAS_CFA_Exam_Preparation/PDF/S09PEaddendum.pdf FFS!! I wish I’d found this before. I was correct all along! You do add the 6000 the answers were wrong!!! thanks for all your help though guys! Would have saved a lot of time if I had found this earlier!

why don’t u use the CFO formula instead… it is so much easier to use.

so why do they still subtract a decrease in NWC in the CFAI Mock PM eh? got an answer for that?

AR Decreased on your Cash flow statement. This means AR increased on your BS between periods. AR Increase means WC Increase.

GOnna do the mock tomorrow.

CP, double check your answer sheet. this is question 19 on the mock PM. the cash flow statement adds a “decrease” in NWC not A/R which makes sense. if you do the B/S method, then the change in A/P is more than the chance in A/R and Inventories, thus NWC decreased. then they go on to subtract this value in the FCFF formula, which is done when NWC “increases”. if NWC decreased then the two negatives would become a positive, thus making you add a NWC “decrease”. so what did i miss CP?

mock PM is on the cards for tomorrow… will let you know.

CPK did you see the erratum? They take the NWC change as 6K and add not subtract it… Aditionally they still use the tax rate of 35.2% which I still can’t see where they get it from? NI = (EBIT-INT)(1-t) therefore T= 1 - (NI/(EBIT-Int)) 1 - (14,600)/(22,000-1000) =30.47% But that doesn’t give me the right answer… Any ideas?

thanks buddy, much appreciated. most likely im just assuming to subtract NWC no matter what happens.

NI is not (EBIT-INT)*(1-T), it’s EBIT(1-T) they have given you 3 periods of Income statement. 2006: 6700/21500=31.16% 2007: 6300/20000 = 31.5% 2008: 7400/23000 = 32.2% I believe there is an erratum that uses the 32.2%.

LOL can’t believe I’m getting that wrong now! done so many questions with this! Anyway better now than on the day. Okay but one last question so it’s t = 1 - NI/EBIT = 1 - 14,600/22,000 = 33.64% Again not what you got. Why do you add the interest expense back to EBIT? Really appreciate all your help!

sorry… it is 35.2% and Taxes/EBT = EBT = EBIT - Int 7400/21000

perfect, CPK thanks a lot for all your help! Time for the PM paper!

i think i figured it out CP so will look out tomm for you to confirm this. this sh*t is why you can’ take anything CFAI gives you at face value. in the CF statement, they have added the change in NWC because the Net NWC change in the B/S is an increase in Liabilities. so the convention is to add an increase in Liabilities. now, the net change in NWC is an increase, which can only be seen if you confirm this from the B/S. THIS is the rub. if the net change in the NWC calc was negative, only then would we add in the FCFF formula. so the moral of the story is to confirm what the CF statement shows with the B/S. disclaimer: i had used the CF method to calc FCFF and thus avoided this mistake. if the testmakers have a d*ick up their culo then they will make us calc NWC from the B/S.