# Differences between FCFF and FCFE

This Q seems simple but I am not understanding why interest payments is LEAST LIKELY a difference? Maybe it’s something with the language they use… Which of the following is least likely one of the differences between FCFE and FCFF? FCFF includes adjustments to revenue for: A) interest payments to bondholders. B) working capital investment. C) operating expenses. Your answer: A was correct! FCFF includes the cash available to all of the firm’s investors, including bondholders. Therefore, interest payments to bondholders are not removed from revenues to derive FCFF. FCFE is FCFF minus interest payments to bondholders plus net borrowings from bondholders.

i hate questions like these only way i see it is that not having debt in your structure (and the related interest expense) is more common then not having changes in working capital or operating exp’s.

If you look at this question as starting to build a spreadsheet model from scratch - given estimates of sales growth, and other factors (depreciation, etc. as a percent of Sales growth) - then in that model for FCFF - you would add back Interest Expense, remove WCInv, Remove Operating Expenses. for FCFE - only WCINv and Expenses would be done…

cpk123 Wrote: ------------------------------------------------------- > If you look at this question as starting to build > a spreadsheet model from scratch - given estimates > of sales growth, and other factors (depreciation, > etc. as a percent of Sales growth) - then in that > model > > for FCFF - you would add back Interest Expense, > remove WCInv, Remove Operating Expenses. > > for FCFE - only WCINv and Expenses would be > done… yeh good point! NY, don’t get too hung up on a Q like this, there’s better ones to spend your time on

on Schw Notes, you could see an estimated and an exact equations when using CFO to calc FCFF, the exact equation has a Interest*(1-t) while the estimated does not. It implies that the Interest*(1-t) has little influence to FCFF/FCFE.

I really dont understand the question. I read it as follow: “Which of the following is NOT different between the computation of FCFF and FCFE?” To which I answer B or C… Can someone give me a hand…?

why B or C? can you care to elaborate? WCInv is removed uniformly for computation of either. (If you start with NI - you remove it manually, if you start with CFO - it is already removed). Operating Expenses are also removed uniformally (if you consider you started from Net Income). In either case - starting with NI or from CFO -> you add back I*(1-T) for FCFF, and do not do the same for FCFE.

Its probably a Reading Comprehension problem. The way I process the information is as follow: When moving from FCFF to FCFE, the only thing that changes is I*(1-Tx). As you said, WC and Operating expenses are the same (uniformaly removed) for both numbers… So, isnt A “the most likely” difference between the two numbers (and B&C the “least likely” difference)?

but they are asking from a FCFF point of view…

the question pretends it ask for differences between FCFF and FCFE, but in second part it says: “FCFF includes adjustments to REVENUE for:” and revenue is not adjusted for interest when calculating FCFF revenue is not NI ok?