Wanted to get some thoughts on this and then discuss my understanding of one of the items. This is from Schweser p 230 Book 4 Concept Checker. Given the following information, calculate free cash flow to equity: NI=50 WCInv=4 Beg Gross Fixed Assets=90; Ending Gross fixed assets=136 Beg Accum Dep=30; Ending Accum Dep=40 Depreciation Expense=27 Capital Ex=65 Net Borrowing=0 In addition, a piece of equipment with an original book value of 19 was sold for 10. The equipment had a book value at the time of sale of 2. The gain was classified as unusual. Free Cash Flow to Equity is closest to: A. 6 B. 10 C. 18 D. 27
I am wondering if we need to start with 42 or 50 for NI based on how you treat the unusual 8 gain on sale. 42 would be normalizing FCFE, but it doesn’t ask for that.
FCFE = 50+27-46-4= 27, D. wouldn’t the sale of equipment be already included in net income?
FCFE = NI + NCC - FCInv - WCInv + NB DE is a non cash transaction, so add it back to NI Sale of Equippment = SP - BV = 10 - 2 = 8 FCInv = CAPEX - proceeds from sale of equip = 65 - 10 = 55 FCFE = 50 + 27 - 8 - 55 - 4 + 0 = 10 = B?
It would be. Subtracting it from net income would normalize it. However, we aren’t given a tax rate so I guess we just ignore it.
Dinesh: Your treatment of subtracting the proceeds from CAPEX makes sense, but wouldn’t subtracting the 8 gain be double counting? 50 + 27 - (65-10) - 4 + 0 = 18
You all are debating the point I was after. Keep it up. If you want me to chime in I will…let me know.
so the sale wouldn’t be reflected in the ending gross fixed asset number? i can assume my answer is wrong because it’s too simple to arrive at. but why wouldn’t the sale of equipment be reflected in the difference between beginning fixed assets and ending fixed assets?
Because the $8 gain was an accounting (non-cash) gain and when doing the NI, they acconted for that non-cash gain too. Hence we need to back it out from NI by subtracting it. The true cash inflow from the sale of equip was $10.
Makes perfect sense to me know, thank you.
man, i’m off track. i’ve got to review equity again as soon as i’m done fighting fsa.
Answer is B. I just want to clear some confusion I have on this non cash gain. I get the fact that it has to be added back to NI because it is a non cash gain and we are trying to determing FCF, so obviously the non-cash gain does has to be subtracted out. What I don’t get is what Niblita hit on earlier about the tax part of it. If the asset was sold for 10 when it had a book value of 2 then the gain is actually a deprecation recapture. So the non cash 8 gain is taxable. So are we adding back the full 8 amount to NI because the taxes on this gain are already reflected in NI?
Also, is there a way to back into capex from the PPE numbers, accum Dep and Dep expense?
^ TRUE. But I wouldn’t worry too much on tax side-effects as they never gave us something like this “The Tax Rate applicable to the company is 40%”
If they did give us the tax rate would we add back to NI 8(1-t)?
I feed dumb and numb when I hear the words ‘FSA and taxes’ together. But since they classified the gain as UNUSUAL, so it got reported below the LINE and hence was net of taxes. And now since the net-of-taxes gain was $8, we just back out exactly that from the Net Income. I just made this up, does this look correct?? Can anybody confirm? BegPPE + change in Accum Depreciation - Depreciation Expense - salvage + CAPEX = EndPPE CAPEX = EndPPE - BegPPE - change in Accum Depreciation + Depreciation Expense + salvage CAPEX = 136 - 90 - (40-30) + 27 + 2 = 65
dinesh.sundrani Wrote: ------------------------------------------------------- > I feed dumb and numb when I hear the words ‘FSA > and taxes’ together. But since they classified the > gain as UNUSUAL, so it got reported below the LINE > and hence was net of taxes. And now since the > net-of-taxes gain was $8, we just back out exactly > that from the Net Income. > That’s a hell of an answer right there. I forgot that below the line items are reported net of tax.
dinesh.sundrani Wrote: ------------------------------------------------------- > I feed dumb and numb when I hear the words ‘FSA > and taxes’ together. But since they classified the > gain as UNUSUAL, so it got reported below the LINE > and hence was net of taxes. And now since the > net-of-taxes gain was $8, we just back out exactly > that from the Net Income. > > > I just made this up, does this look correct?? Can > anybody confirm? > > BegPPE + change in Accum Depreciation - > Depreciation Expense - salvage + CAPEX = EndPPE > > CAPEX = EndPPE - BegPPE - change in Accum > Depreciation + Depreciation Expense + salvage > > CAPEX = 136 - 90 - (40-30) + 27 + 2 = 65 Hi Dinesh, 8 is not net of tax ( sale price 10 - BV at time of sale 2) and if they would have given the tax rate then we would have subtracted 8(1-t) as mentioned by Mwvt9. It is a typical account question combined with CF. I would be more comfortable keeping GROSS PPE and ACCU DEP account separately. Fortunately here they have given CAPEX and Deprn for the year otherwise u can calculate both these with the given information.
Hi Dinesh, unfortunately unable to draw a T chart/account here otherwise would have explained it in a better way.
Thanks - ok, I’ll come online to gtalk