FCFE & FCFF

CFA Level II
#1

Hi all,

I am a bit confused on something regarding FCFF & FCFE.

There is a question in Schweser EOC (P167 , Q9)

It has asked to calculate the FCFE. The question before asked to calculate the FCFF.

Now, what I am confused about is, if you are to calculate the FCFE, I would apply the normal formula (CFO - FCInv- WCinv + Change Debt)

However, when this is applied to the question it gives you the answer C of 99.

The answer suggests that it is not 99 and that the answer must be calculated from FCFF Number calculated previously.

Why must we use FCFF to calculate FCFE? I know it is possible with another formula, but surely we should be able to calculate FCFE from the first principle just using the information in the vignette? (NI+ Dep+ Div - FC Inv - WC Inv + change in debt?) Surely the answer should be the same whichever way you take to get it?

Thanks

#2

Why do you add dividends?

#3

I did not think that we were supposed to, but the EOC solution suggested to add it?

Can anyone else add any light on my question above?

#4

You normally would not, but these are preferred div. Think about FCFE as being the CF to COMMON shareholders, who would not receive the preferred div. Thats why you subtract Int(1-TR) becasue COMMON shareholders to do not benefit from the tax shield.

I hope this helps.

#5

Make sense.