 # FCF q

ng30 Wrote: ------------------------------------------------------- > mv, > > it’s asking for forecasted FCFE, which has the > different formula. i didn’t catch that either. They should all work, I think.

mwvt9 Wrote: ------------------------------------------------------- > Niblita75 Wrote: > -------------------------------------------------- > ----- > > 600+500-800+(.4(800-500)) = 420 > > > > Don’t know why it works, but net borrowing = > FCinv > > less depreciation times the DR does. > > I don’t either! In schweser they highlight that > FCInv=capital expenditures-proceeds from sales of > long-term assets > > where capex=ending GROSS PPE-beginning GROSS PPE. > > So why are we using depreciation to figure out > FCInv? I don’t get why 800-500 is used to calculate the net borrowing either… I thought i knew this well… I did notice in the schweser quicksheet though next to the formula for FCFE = NI - ((1-DR)*(FCinv-Dep)) - ((1-DR)*(WCinv)) that they say (Used to forecast) maybe that’s the key thing we need to remember in case cfai tries to throw us off with a question asking for this years FCFE (not forecast),but gives additional debt and equity information…

Mumu they were asking about forecasted free cash flow to equity. So if you use the DR formula you save yourself from a lot of trouble. But if you start deriving FCFF from the NI formula, then you need to make sure that you are maintaining the target debt to capital ratio for the next year (since it’s a FORECAST and that’s a basic assumption of free cash flows valuation(duh, really??)), so you need to calculate the Net Borrowing from the present CAPEX. And then you have to finance that CAPITAL NEED (THE CAPEX) from either the DEBT or the EQUITY. But what Net Borrowing is the one that we get from borrowing from DEBT. So NB in this case is 120

yeah…but why is the capital financing for 300 and not the entire 800 of capex…

dinesh the thread doesn’t explain why the capital spending is netting out depreciation…that’s my question… why isn’t capital spending just 800?? why is it 800-500?

Same question here.

Ideally how I thought about it was that, all the formulas should give in the same value of FCFE i.e 420. The formula that started with NI was giving only 300 (so we are 120 short there). Then I tried all reconciliation processed to bring it to 420, and was successful by doing (800-500)*0.40. So I just posted the question otta here where maratikus and slouiscar gave in their suggestion after which this concept has just been hanging to the cobweb of neurons with no real reasoning as to ‘will this really work for other questions too…’. So it is what it is, unless an expert helps us out here.

Net FCInv = FCinv - Dep thus net fc = 800-300 = 500

Why? You had to spend 800 in cash and depreciation is non cash.

ok this is my logic… dont know how much it is actually correct we know that FCFE = NI + NCC - FCInv - WCInv + Net Borrowing Assuming that depreciation is the only NCC we can rewrite the above equation as: FCFE = NI - (FCInv - Dep) - WCInv + NB --------- equation 1 By assuming a target Debt Ratio (DR) we eliminate the need to forecast Net Borrowing as NB = DR(FCInv - Dep) + DR(WcInv) substitute this back in equation 1 we get forcasted FCFE = NI - (1-DR) (FCinv - Dep) - (1-DR) (WCInv) hope this helps!!!

Thanks ruckmani.

mwvt9 - welcome! did the explanation make sense to you?

It seems to. Believe it or not my algebra is so bad that I make mistake manipulating formulas all the time.

well - I have a background in math, so manipulating formulae is pretty much the only thing I can do well ruckmani thanks…that does help!