FCFE from FCFF (Schweser Practice Exam, Day 1, Q20)

Hi, I was confused on how to calculate FCFE from FCFF. It’s Q20 of Day 1 Schweser Practice Exam. The following info is given. Interest paid in 2007: $25,488 Tax rate: 30% Principal repayment of long-term debt in 2007: $33,275 Notes payable issued in 2007: $5,866 2007 net borrowing: $27,409 Question: What’s the relationship between FCFF and FCFE in year 2007? A. FCFF=FCFE+$9,567 B. FCFF=FCFE+$27,409 C. FCFF=FCFE+$45,251 D. FCFF=FCFE+$52,897 Here’s what I did. FCFE=FCFF-Int*(1-t)+net borrowing =FCFF-$25,488*(1-0.3)+$27,409=FCFF+$9,567 --> FCFF=FCFE-$9,567 And my answer is not even in the choices (A is wrong sign). Could anyone explain what I did wrong?

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have you checked out schweser’s explanation? i got this wrong as well and i was a bit confused by the explanation. i plan on going back to review it, but i’m not logged in anymore…

Hi cfasf1, Thanks for the response. Are there Schweser’s explanations!? I didn’t realize that. Can anyone tell me where I can find them? Thanks in advance!

You may also want to put “spoiler” on your title so people who haven’t taken the exam yet don’t click on this and find answers to the test they haven’t taken yet. to answer your question yes there is. you sign in online at schweser and go to online access home on the top left, once you click on that, you should see “practice exam 1” under online tools. click on that and it will let you enter your answers and give you all the explanations and comparisons vs others who have taken it. i’m back in now. their answer is below, in case you have trouble getting in. Your answer: B was incorrect. The correct answer was C) Free cash flow to equity (FCFE) can be expressed in terms of FCFF as follows: FCFE = FCFF – Int(1 – tax rate) + net borrowing Therefore, the amount by which FCFF exceeds FCFE can be written as: FCFF – FCFE = Int(1 – tax rate) – net borrowing Int = $25,488 Net borrowing = $5,866 – $33,275 = –$27,409 (additional information) Therefore: FCFF – FCFE = $25,488(1 – 0.3) – (–$27,409) = $45,251 (Study Session 12, LOS 47.e)

Thanks a lot, cfasf1! That was very helpful. Sorry to all I didn’t say “spoiler” in the Subject.

no prob. good luck studying.

If you read the problem, it states that net borrowing is positive $27,409. I believe this is an error because it should be negative- per the payback and issuance of debt. I really hope they did not put this in there to throw us off. Could someone confirm if they believe that it was an error on Schweser’s part to have net borrowing as a positive figures?

anyone?

I agree the “net borrow” is a little confusing, but they do split it out. fyi - there is no errata posted for this. FCFF = $87,727 (from previous q) FCFE = FCFF - (int*(1-t)) +/- NB NB = 5,866 - 33,275 = 27,409 = 87,727 - (25,488*0.7) - 27,409 = 42,476.40 FCFE-FCFF = 87,272 - 42,476 = 45,250 => answer C

FCFF = FCFE + Interest (1-tax) - Net Borrowing Net Borrowing = (-33275) + 5866 = - 27409 Intrest (1-tax) = 25488 * 0.7 = 17841.6 Hence, FCFF = FCFE + 17841.6 - ( - 27409 ) = FCFE + 45250.6 Ans: C

I agree, all of the information is there, but you would think if they give you net borrowing, they should have at least put the proper sign in front of it. The didn’t borrow 27,409, they paid back 27,409 (33275-5866). Perhaps if it said net repayment of debt obligations it would have worked. I still believe that it was an error on schweser’s part.

Very misleading, I got tricked up by the sign as well. I think it should have been Net Borrowing -$27,409

I agree. Schweser should have said “Net borrowing -$27,409”.