Is is (CA - cash) - (CL) or Change in AR + Change in Inv - Change in AP or ??? Everytime I study FCFF/FCFE it seems like there is a new formula for WCInv. No matter how hard I try I always get it wrong. I’m so demoralized.
use (CA- Cash) - (CL - Debt), your second statement is correct pending those are the only WC items given, yet there can be others, use the first one to be safe!
The two formulas are the same. You just use “change in” when you want to isolate the project’s need for WC. You can’t claim all (CA-cash) - CL for your project…just the change in these that matters.
Do you guys answer most WCI question correctly? No matter how much I try, even memorizing the formulas, I get WCI and Net Borrowing wrong
I use the formula Northeastern posted and never had a problem.
Provide questions where you have had trouble. we can walk thro’ to see where you are getting the issues…
CPK, thanks. I’ll find some q and post them. First things first, though. Northeastern Student says to use this formula: (CA- Cash) - (CL - Debt) debt is…long term debt?
No it will be short term debt (notes payable included). Remember this is happening in your current assets and liabilities.
Ok so… For the purposes of calculating Free CF, the NWCI would be calculated as Change in NWCI = Change in(Current Asset - Cash and Equivalents) - Change in(Current Liabilities - Short term Debt and notes payable). Notes payable isn’t accounts payable right?
Correct.
Thanks for all the awesome responses, but what is “short term debt” you say : " Change in(Current Liabilities - Short term Debt and notes payable). " I thought Current liabilities is the same thing as short term debt! I though they were both accounts payable.
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Short term debt is is comprised of any debt incurred by a company that is due within one year (Made up of notes payable or current portion of long term debt). It is bank loans which you take to finance current liquidity requirements. Accounts payable is any amount owed as the result of a purchase of goods or services on a credit basis. Technically you are right. Short term debt could be classified as notes payable, accounts payable, accrued and current portion of long term debt. But we don’t make that classification.
I think you need to sort of understand what WCINV is and you won’t have a problem. I’ve always used change in AR + Inv - AP and never had a problem. Anytime these weren’t included, I just intuitively found the answer by arriving at (CA - cash & equiv.) - (CL - STD).
thanks
Just want to confirm that the NWCInv in FCFF and NWCInv in Capital Budgeting differ slightly. FCFF’s NWCInv is as described in the above posts i.e. Change in(Current Asset - Cash and Equivalents) - Change in(Current Liabilities - Short term Debt and notes payable) While NWCInv for Capital Budgeting is non-cash CA - non-cash CL i.e. Capital budgeting NWCinv includes cash equivalents? I though this was the case but now I am doubting myself. Mike
Just want to confirm that the NWCInv in FCFF and NWCInv in Capital Budgeting differ slightly. FCFF’s NWCInv is as described in the above posts i.e. Change in(Current Asset - Cash and Equivalents) - Change in(Current Liabilities - Short term Debt and notes payable) While NWCInv for Capital Budgeting is non-cash CA - non-cash CL i.e. Capital budgeting NWCinv includes cash equivalents? I thought this was the case but now I am doubting myself. Mike
STEP 1 - adjust CA and CL CA’ = CA - cash - marketable securities CL’ = CL - debt portion - notes payable — STEP 2 - use adjusted CA/CL WC = CA’ - CL’ then you use END WC - BGN WC = WCInv ----------------- DO NOT use AR + Inv - AP cause this does not apply for all scenarios. USE WC = (CA - cash - marketable securities) - (CL - debt portion - notes payable)
For the purposes of calculating FCInc (ie Capex), is it the difference in gross PPE or net PPE?
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