FCFE vs FCFF

CFA Level II
#1

When is it appropriate to use FCFE and FCFF respectively? Does it matter how much debt the firm has? Thanks!

#2

It depends on question what to use in order to get the answer. If company has optimal (stable) capital structure then you can use FCFE but if company has volatile capital structure, use it FCFF.

#3

FCFF, unstable amount of debt or highly leveraged

#4

I’ll give it a shot… FCFF if firm has changing cap structure, highly levered, divs or no divs, neg fcfe, when purch entire firm FCFE if firm has divs/no divs, stable cap structure

#5

And what to use if they explicitely mention that there is constant propertion od debt and equity financing and the option choice has FCFE and FCFF both?

#6

^FCFE?

#7

The question will always (I’ve found) let you know which FCF they’d like you to use. Post a question where it was confusing about which one to use, if you wouldn’t mind. I’ve never seen one - it’s always pretty straightforward.

#8

cfaboston28 Wrote: ------------------------------------------------------- > ^FCFE? haha - you know what I am taking about :wink:

#9

Under the assumption that PCC maintains relatively constant proportions of equity and debt financing, the most appropriate valuation model is the: A. FCFF B. FCFE C. Residula Income

#10

RI?

#11

Under the assumption that PCC maintains relatively constant proportions of equity and debt financing, the most appropriate valuation model is the: A. FCFF B. FCFE C. Residula Income I would say FCFE now… When will RI be used?

#12

RI is used when earnings are negative.

#13

C as well, simply because RI is the only model where you need the specific percentages of debt and equity. BTW, my country club is called “PCC” (random fact of the day).

#14

Ans is FCFE.

#15

Without reading the explanation, I’m gonna say that’s a poor question (and probably will after reading the explanation as well, but we’ll see). Mind posting the explanation?

#16

Q65, Schweser-3PM

#17

I remember this questions from Schweser. I think it is poorly phrased and ignored it

#18

Yeah, to me that’s a stupid question.

#19

But giving it some thought, perhaps it’s not that “bad” of a question when taken in context - need to read the vignette and see what “clues” it gives you before I make the blanket statement that it’s a bad question.

#20

I am totally confused here. Please tell me the following If the company has changing capital structure - which one is the preferred method? FCFF or FCFE?