I’ll post the answer in a few minutes. It may be easy for most, but part of it I don’t understand…I’ll clarify in 5 to 10 minutes. The following information was collected from the financial statements of the Hiller Corp. for the year ending December 31, 2000: Earnings per share = $4.50 Capital Expenditures per share = $3.00 Depreciation per share = $2.75 Increase in working capital per share = $0.75 Debt financing ratio = 30 percent Cost of equity = 12 percent The financial leverage for the firm is expected to be stable. The FCFE for the base-year will be: A) $3.80. B) $3.00. C) $4.15. D) $4.85.
A
A NI - (1-DR)*(FCinv-Dep) - (1-DR)*(WCinv) 4.5 - (.7*(3-2.75)) - (.7*.75)
= 4.5 - (1 - 0.3)*(3 - 2.75) - (1 - 0.3)*(0.75) = 3.8 = A
The correct answer was A. Base-year FCFE = EPS - (Capex - Depr)*(1 - Debt Ratio) – Incr. in WC*(1 - Debt Ratio) = $ 4.50 - ($3.00 - $2.75)(1 - 0.30) - $0.75(1 - 0.30) = $3.80. AS I did a couple of more related questions, I see the same method of calculating, but I guess I memorized the formula as NI + NCC, etc. So why is the NCC of Depreciation subtracted…I HATE FSA *&^%.
Is there a reason they don’t simplify this formula? FCFE = NI - (1-DR)*(FCinv-Dep) - (1-DR)*(WCinv) FCFE = NI - [(1-DR) * (FCinv - Dep - WCinv)] just curious since I am lazy and it saves 2-3 keystrokes.
^^ agree totally… it’s like theire TRYING to intimidate you with the crazy long formula… or maybe it works better intuitively for some people…who knows…
Why are we subtracting depreciation and not adding the non-cash charge to NI?
planner Wrote: ------------------------------------------------------- > Why are we subtracting depreciation and not adding > the non-cash charge to NI? just math fun you add to NI the NCC and subtract FCinv and WCinv… or you subtract from NI the net amount of (FCinv + WCinv - NCC) - (FCinv + WCinv - NCC) = - FCinv - WCinv - (- NCC) = - FCinv - WCinv + NCC no child left behind my friend.
Thanks for taking the time stlouis! I should have figured that one out…I have spent way to much time on FCFF & FCFE (what seems to be pretty basic hasn’t quite clicked). I’m sure it will by exam day (hopefully exam day 2008 and not 2009). Thanks again.
slouiscar Wrote: > FCFE = NI - [(1-DR) * (FCinv - Dep - WCinv)] that’s exacly how I do it in this kind of problems.
^^ one quick note on that formula… in this question the WC increased by $0.75 so that is a negative WCinv that is why the formula here ended up as FCFE = NI - [(1-DR) * (FCinv - Dep - WCinv)] I’m pretty sure the catch all formula is FCFE = NI - [(1-DR) * (FCinv + WCinv - Dep)]
you are right, slouiscar. what’s important is calculating expenditures (fixed and net working), then subtracting depreciation and taking the portion that is financed from equity.
no sweat planner. IMO you can’t spend too much time on a FSA LOS. I want to kill FSA. FCFE/FCFF is LII’s CFO direct/indirect. a lot of related formulas, unlimited scenarios, tons of concepts to test. learn it, live it, love it. well, at least don’t hate it.
slouiscar - agree. The CFO direct/indirect took me a lot of time last year too. It seems FSA has spread to so many study sessions this year (equity, FI). As I learn it, I will be forced to live it, but I vow to never love it (until it’s over)! Oh well, I’m movin’ on for the day. Thanks again.