Do we subtract preferred dividends when calculating FCFE if given?
When we are calculating FCFE starting with Net income available to common, if Preferred dividends were already subtracted when arriving at Net income available to common, no further adjustment for Preferred dividends is required. However, issuing (redeeming) preferred stock increases (decreases) the cash flow available to common stockholders, so this term would be added in. In many respects, the existence of preferred stock in the capital structure has many of the same effects as the existence of debt, except that preferred stock dividends paid are not tax deductible unlike interest payments on debt.
Simple answer - Yes.
idreesz Is this statement really correct? issuing (redeeming) preferred stock increases (decreases) the cash flow available to common stockholders, so this term would be added in. I thought - when you issued preferred stock - amount available to pay to common stock holders REDUCED. (not increased as you have written). when you redeem - it increases. Please confirm, or am I understanding something wrong?
They key here (I believe) is that the issuance of prefs brings capital in that is potentially available to common shareholders just like net new borrowing. You’re right in the sense that in the long term these prefs will have to be paid (out of retained earnings??) which reduces funds for common shareholders but the initial cash inflow is available to equity…
For FCFF - preferred dividends are added back. For FCFE - modify net borrowing to reflect net issuances of preferred stock.
Unilever Wrote: ------------------------------------------------------- > They key here (I believe) is that the issuance of > prefs brings capital in that is potentially > available to common shareholders just like net new > borrowing. You’re right in the sense that in the > long term these prefs will have to be paid (out of > retained earnings??) which reduces funds for > common shareholders but the initial cash inflow is > available to equity… +1
cpk123 Wrote: ------------------------------------------------------- > idreesz > Is this statement really correct? > > issuing (redeeming) preferred stock increases > (decreases) the cash flow available to common > stockholders, so this term would be added in. > > I thought - when you issued preferred stock - > amount available to pay to common stock holders > REDUCED. (not increased as you have written). > when you redeem - it increases. > > Please confirm, or am I understanding something > wrong? Sorry CP, I was out of touch with the forum. Unilever answered it right.