We are given data:
NI=280 Dep=120 WCInv=40 net PPE increased from 140 to 160 LT Debt increased from 20 to 30 Notes payables increased from 10 to 15 The company sold a piece of PPE with a BV of 20 for 35. Tax rate = 30%.
Need some help here guys…
Change in Debt = ( 15 - 10) + (30-20) = 15
FCInv:
Net PPE Begin = 140
Net PPE End = 160
Sale of equipment => Equipment with BV of 20 was sold for 35 - So Gain on Sale = 15
FCInv = Net PPE End - Net PPE Begin + CapEx - Sales
= 160 - 140 + 0 - 20 = 0 (assumed 0 since nothing was explicitly given)
NI + Depr + WCInv + FCInv - Debt = 280 + 120 + 40 + 0 - 15 = 425?
My shot is completly different:
FCFE = 280 (NI) - 15 (gain on sale) + 120 (Dep) - 40 (WCInv) - 20 (net FCIvn) - 120 (Dep again) + 10 (LTD) + 5 (Notes payables) + 20 (sale of PPE) = 240.
Although I am not sure in terms of how to treat sale of and gain on PPE.
FCFF = NI + NCC + INT(1-t) - FCInv - WCInv
FCFE = FCFF + Net Borrowing - INT(1-t)
Therefore:
FCFE = NI + NCC - FCInv - WCInv + Net Borrowing
NI= 280
NCC = Dep = 120
FCInv = (160-140) - (35-20)(1-0.3) = 9.5
WCInv = 40
Net Borrowing = (30-20) + (15-10) = 15
FCFE = 365.5??
Please tell me I got this right…
Ok, I think I have it right.
Kobi, your attempt was right until the very end. You need to use the actual proceeds from the sale, not the book value. I think of FCinv as (Ending net PPE - Beg Net PPE + depreciation) - (proceeds from sale). Then you also have to remove the gain.
You essentially removed the gain twice (by subtracting the 15 gain and only giving them 20 for the sale).
I have the exact same calculation as kobi, except make the proceeds from sale 35. I get 255.
I got 365.5 also. That FCInv portion is the trick…hope I’m correct. Answer?
Ok not sure how to account for the taxes, but alan and general, you have to include the depreciation because we are given NET ppe, not gross.
FCFE= NI+ NCC-FCInv-WCInv+Net Borrowing
=280+(120-15)-105-40+15=255
NCC= Dep 120
- Gain on PPE/ Asset sold (-) 15
=105
FCInv=(Change in Net PPE + Dep-Asset Sold) =(20+120-35) =105
Net Borrowing - ( Change in LT Debt + Change in Notes payable) (10+5)=15
See the net borrowing adjustment for eg. as last year you had 20 Million of Debt, this year it has increased to 30 Million , it suugest we had taken additional borrowing of 10 million , same holds true for notes payable .
Gain on asset sold need not be adjusted for tax as NI is after accounting for this gain & after tax figure. I hope this should be true. Please tell if the answer is correct.
Jitendra, I did the exact same thing as you except I removed the 15 dollar gain to get to 255. Is that not right?
What is the right answer?
yeah, that calc does include Dep of 120. Mine was
280+120-9.5-40+15
not confident on that though, this is a good problem.
Agree with mpearc4 , 255 should be correct.
Probably a stupid questions but is that depreciationg the “depreciation expense” or "accumulated depreciation? I could never get it clear whether the net PPE is to subtract the Dep Exp of the period or the accumulated dep amount…
I got 220 FCINV = 160-140+120+15 Net Borrowing = 15 WCINV =40 So FCFE=280+120-155-40+15=220 Its amazing how many different answers we all got on here.
ryokho it will be depreciation expense.
If u have Gross PPE given for both year, simply take the difference i.e FCInv= (Gross PPE t- Gross PPE t-1) - Gain on asset sold if any.
If they have given u only net PPE then
FCInv= (Net PPE t- Net PPE t-1 + Depreciation Exp) - Gain on asset sold if any.
I
Broberts u have left the Notes payable in Net borrowing, it will also be there, I have just refer to CFA book.
Is what your saying that notes payable shouldn’t be included in net borrowing?
235?
wait, is it the “gain on sales” that you are subtracting or the “proceeds from sales”?
I also get 255. What’s the verdict?