CFA Mock #51 FCFE and working capital

Why is change in working capital computed with cash and notes included? Schweser says to calculate WCInv as the change in working capital, excluding cash, cash equivalents, notes payable, and the current portion of long-term debt.

I’m really confused by this as well. I’ve got the change in working capital as the change in non-cash current assets - the change in non-debt current liabilities. So I came up with a different working capital number than they did. Then on net borrowing, they took the increase in debt minus the increase in notes payable. If anything, higher notes payable is similar to higher borrowings, so I would add them together rather than do it the way they did. Can anyone explain this?

yeah i agree…could be a mistake…cash definitely should not be part of change in WCinv. I would love to hear an explanation for these.

You are correct cash/cash equiv should be left out. Notes payable and CMLTD are considered financing should they should be left out too

Cash plus notes payable should definitely be left out for purposed of valuation and cash flow analysis. I am 100% positive about this. This has come up before and I was also confused because I found an error in a practice exam that contradicted the text. Working capital is defined as CA-CL. However, for cash flow analysis, since a change in cash is what we are trying to explain, we do NOT consider them when trying to calculate WCinv.

It has to be a mistake

thank God

Has it been confirmed as a mistake?


Pg 393 V. 4, bottom of page

Can somebody explain to me why net borrowing is only 2.5? Seems to me they borrowed 5 of Notes Payable. (15 increases to 20) They also borrowed 7.5 in LTD. (150 increases to 157.5) Total is 12.5. OR If Notes payable is the current portion of LTD: 5 of the LTD became current, that is why Notes Payable increases by 5. Then LTD would be decrease to 145 before any borrow/repay. Having an ending LTD at 157.5, doesn’t that mean that they borrowed 12.5? Why do I keep adding 5, when CFAI minuses 5??

If this question was on the actual exam it would end up getting thrown out. It’s a bad question and you’re calculating it correctly while they calculated it incorrectly.

I agree that this question is not good. But, what happens if Notes payable increases? what should I do? To me, it means they borrowed more. But on the test, should I add or minus an increase in N/P?


anybody have more input on the change in notes payable and how it affects FCFE?

Hi, We all agree with this formula : FCFE = FCFF – (1-T) Interest Expense + Net borrowing. Net borrowing = Increase in LT Borrowings - Debt repayment. In the balance sheet, the increase in note payable from one year to another (except if more information are given) correspond to the current portion of LT debt which is a debt repayment. So, back to our problem 1) LT debt increased from 150 to 157.5 = +7.5 2) Notes Payables increased from 15 to 20 = +5 (which is a repayment). Because the company borrows more in the year than it repays it will have additional funds - net borrowing - that is added to FCFF in order to determine FCFE. Then the net borrowing is 7.5 - 5 = 2.5 ! CQFD In conclusion, I think, it’s not an error. Your contribution would be appreciate if you don’t agree with this. BK

Cash and NP shouldnt be included in the calculation of change in net working capital however notes payable should be included in net borrowings when calculating FCFE.

The Solution to #3 on page 407 [Volume 4 - Reading 43 - Free Cash Flow Valuation] in Example 6 clearly shows that an increase in Notes Payable increases Net Borrowing. The question asks you to find FCFE from Net Income. Net Borrowing was determined as $75M due to an increase in Notes Payables of $50M and an increase in L/T Debt of $25M.

I’m sure glad there are people smarter than me on this forum. I was pulling my hair trying to figure this out. I agree that cash/cash equivalents should not be made part of WC. The increase in Notes payable is deceptive because it falls as a current liability, meaning that it’s increase could be viewed as a repayment of debt, in this case 5. But, it can also be viewed as having borrowed 5. I would have said borrowed 5 had the increase in Notes payable not been listed under current liabilities (payable within 12 months). Can someone please clarify?

This is in the errata