FCFE Page 178 Q22. Schweser just not adding up ! ??

CFA Level II
#1

Given:

NI= 50

WCInv = 4

Begn Gross Fixed = 90

Ending Gross Fixed = 136

Begn Accumulated Depreciation = 30

Ending Accumulated Depreciation = 40

Depreciation Expense = 27

Capex = 65

Net Borrowing = 0

Gain from Sale = 8

Solve for FCFE:

FCFE = NI + Net borrowing + Depreciation - WCInv - FCInv - Gain from Sale

= 50 + 0 + 27 - 4- 8 - FCInv

Scheweser has calculated FCInv as: Capex - ( Ending Accumulated Dep - Beg Accumulated Dep )

= 65 - ( 10 ) = 55

This is essentially FCInv = Capex - Depreciation

What confuses me is that they have given Begn Gross Fixed Assets and Ending Gross Fixed Assets.

And FCInv is also (Ending Gross Fixed Assets - Begn Gross Fixed Assets) = 136-90 = 46

I used this and got it wrong !! Please can someone explain why it is not adding up !!

And how to go about the process to handle this because there seem to be so many convoluted ways of getting FCINv

#2

Net PPE End = Gross PPE End - Accum Depr End = 136 - 40 = 96 Net PPE begin = Gross PPE begin - Accum Depr begin = 90 - 30 = 60 End Net PPE = Beg Net PPE + Purchases - Deprn - BV(Sold) 96 = 60 + 65 - 27 - BV(Sold) So BV(Sold) = 2 Gain on Sale = 8 So total Selling Price = 2 + 8 = 10 Now FCInv = Capex - Sold = 65 - 10 = 55

#3

You need to remember in these calculations the following:

Gross PPE - reflects both the impact of the new purchase, and the sale of old.

Accum Depreciation - Also has impact of new depreciation expense, and a change in depreciation total amount due to the sale of equipment…

So the best way is to eliminate the differences and to go with the Net PPE figures which you can find given the numbers like above, and then work backwards.

If there had been a loss on Sale of equipment - then -

BV(Sold) - Loss on Sale = Sale Proceeds.

Now here you had a gain

so BV(Sold) + Gain on Sale = Sale Proceeds.

Once you have CapEx and the Sales proceeds - finding the FCInv is straight forward.

This same equation can also be used to find the CapEx - if the other numbers had been given… So watch out for that other variant.

#4

Thank you Krish, all understood now.

#5

Something I learned new in this to include asset sale in PPE calculations. Thanks cpk. +1

#6

When calculating FCFE or FCFF are we supposed to account for changes in CASH and MKT INVESTMENTS?

I see some include it in the calculation to get the increase in WC and others do not.

What is the right way?

Thanks

#7

You wouldnt account for changes in Cash… that is the figure you’re trying to explain. Subtract Cash and Current portion of Long Term Debt/STD

#8

i got burned last year with Schweser