Hi,
need some help in 2 questions
On pg 178 of the schweser book# 3 question 21-why is the answer C, in this case if the company pays interest from 09-2017 and interested in added in the FCFF formula so then why does the answer says FCFF remains the same. the formula clearly adds aftertax interest,
Question # 4: how do you calculated the FCInv. i am not getting this ? pls help thankls
post the problem please i don’t have the books
I had a similar question in relationship to the CFAI materials question, Prob #1 Reading #40. The schweser problem states that the company issues new senior debt. Issuing new debt will increase net borrowings which only impacts FCFE, not FCFF. However, in future years, interest expense will be higher and, since the FCFF formula includes interest expense - the initial reaction is that FCFF should be adjusted higher in future years.
While FCFF does add back in interest expense, the interest expense itself will decrease Net Income by exactly the same amount. So Net Income is actually lowered in future years by the increased interest expense, however, the FCFF formula adds this interest expense back in - resulting in zero change. Credit goes to the guys who answered my question in the forums posted today.
Im not using Schweser so Im not sure on the details of the question but here are a couple of ways to calculate FCinv
End gross PPE - Beg gross PPE
End net PPE - Beg net PPE + DEP