One question out of Schweser practice that asked to calculate the difference between FCFE and FCFF. I apply the formula straight: FCFE = NI + Deprec. - FCINV - WCINC + Net borrowing The net borrowing is positive, I ended up having my FCFE > FCFF. When I read the explanation, I notice that net borrowing in the FCFE formula has an implicit “negative” sign stuck to it so that adding a negative is actually subtracting it. I am little tired to rationalize why net borrowing ends up getting taken out of the FCFE cash flow. Appreciate if someone can break it out…
Also, confirm that this sign issue is right.
One of the questions, you repaid more debt than you issued, negative net borrowing reduces FCFE . . . I think.
Was it question 20 Exam 1 AM?
FCFE = FCFF - int(1-tax) + net borrowing FCFE = FCFF - 25,488(1-.3) + (5,886 - 33,275) FCFE = FCFF - 45,251
i had same issue - you are told there is net borrowing of 27mm (I think) when actually there is debt repayment of 32mm and new borrowing of 5mm when you look at breakdown of info provided. effectively, there was net repayment which brought FCFE down if I remember correctly…very sneak Q I thought
very tricky indeed. Thanks for the help here.
Boy That Niblita75 don’t play around.