Ok I’m getting a little crazy right now…just went through the schweser videos and there’s a discrepancy between a couple of the slides and the proper calculation of FCFE starting with EBIT and EBITDA… I was under the impression the FCFE was cash available to the equity holders, after taxes after interest payments to bondholders. So I’m fairly certain you need to subtract off interest(1-t) in the calculation of FCFE starting with EBIT or EBITDA but a review of the formulas in schweser provide conflicting definitions…I think the formula SHOULD be: FCFE = EBIT (1 - Tax rate) - Int (1 - Tax rate) + Dep - FCInv - WCInv + Net borrowing FCFE = EBITDA (1 - Tax rate) + Dep (Tax rate) - Int (1 - Tax rate) - FCInv - WCInv + Net borrowing Now, schweser has them as: FCFE = EBIT (1 - Tax rate) + Dep - FCInv - WCInv + Net borrowing FCFE = EBITDA (1 - Tax rate) + Dep (Tax rate) - FCInv - WCInv + Net borrowing Anyone want to tell me I’m not crazy??
where did you see the Schweser formulas? I think your right, because when you arrive for calculation using FCFF: FCFE = FCFF - [Int * ( 1- tax rate)] + net borrowing. And to get FCFF from EBIT, your already: [EBIT * (1-tax rate)] + dep - FCInv - WCInv. So, I think your right, but I don’t see any pages where Scwheser arrived at FCFE using EBIT or EBITDA
In the DVD videos actually… It’s on DVD 10, section 5 (i know this because i reported it to Schweser!!) On one slide they show the calculation by subtracting the interest(1-t) and then they kind of sum up all the formulas a few slides later and the formula is showing but without the interest(1-t)…very frustrating trying to find the right answer!!!
Oh. I don’t have the dividends. Did you check the erreta?
We start with FCFF which is the capital to the bondholders and stockholders FCFF = EBIT (1 - Tax rate) + Dep - FCInv - WCInv Then to calculate FCFE 1. We subtract the interest expense net of taxes: [Int * ( 1- tax rate)] 2. AddBack net Borrowing: NB FCFE = EBIT (1 - Tax rate) + Dep - FCInv - WCInv - [Int * ( 1- tax rate)] + NB Which is the cash available to the stockholders. So the formula seems to be correct.
“So the formula seems to be correct.” You mean Pencil’s formula?
I agree…thanks!
Yes CFAHouston - Pencil’s formula looks correct to me intuitively. “FCFE = EBIT (1 - Tax rate) - Int (1 - Tax rate) + Dep - FCInv - WCInv + Net borrowing” But these days my intuition is on a union strike, so correct me if I am wrong?