FCFE Formula, Interest Incorporation

CFA Level I
#1

In which part of the FCFE equation is interest incorporated into? They claim FCFE includes interest but I cannot exactly pinpoint it is within the equation…

#2

Interest expense is part of net income.

#3

  1. As FCFE = CFO - FCInv + Net Borrowings and Net borrowings= borrowings - repayments, I really cant figure out what they mean by “borrowing” and “repayments”. Do they refer to debt rasied (borrowing) and the interest paid (repayments)?

  2. Also CFO may differ under IFRS and US GAAP under some circumstances. For example dividend income is part of CFO under US GAAP but under IFRS it may be either part of CFO or CFI. How do we account those differences when calculating FCFE? I know by CFO book refers to Net income + non cash charges - changes in working capital. But when we do it in real life and if we want to calculate it by taking CFO number, do we need to account the differences?

Note: I was going to create a new topic, but I found this topic relative.

#4

Borrowing is debt raised. Repayment is debt retired, not interest paid. Repayment includes principal repayment on amortizing loans/notes/bonds and retirement of nonamortizing loans/notes/bonds.

The formulae assume US GAAP treatment of cash flows.

If you’re using IFRS and classify cash flows differently than you would have under US GAAP, you need to make adjustments. So, for example, if you classified dividend income as a CFI inflow, you need to reclassify it as a CFO inflow in computing FCFF and FCFE.

#5

Thank you very much Magician, you are very inspiring :slight_smile:

#6

You’re quite welcome.