Can someone explain the intuition for: FCFE =NI - [(1 - DR) x (FCInv + WCInv - Dep’n)] ? I don’t follow the Schweser explanation. thanks
you need to fund your business with equity so if your FCInv and WCInv increase by 100 bucks, you need to figure how much is getting funded with equity lets say 30% is debt, 70% is equity, so you would fund 70 bucks with equity so NI - (1-.3 x 100 - Dep)
You summed it up better than Schweser Mike
thanks mike, but still not totally clear. think I will have to wipe the dust of my CFAI books and take a look
You are basically allocating how much of the FCInv and WCInv in financed with debt vs equity. It is a fast way to determine the net borrowing piece of the FCFE formula.
mike here is an additional two cents: lets look at the individual terms: 1. FCInv - Dep is just investment in non capital assets. WC inv is just working capital. 2. The fraction of these two u financed with debt is DR times each of them 3. The portion you financed with equity is [1 - DR] times each of them. 4. Where does the equity created for the year come from? It is NI. IT is not from Common stock, that is history. So in summary, u are saying, I generate NI and it is available to finance investment. If I use debt of DR, then I will use equity of 1 - DR. What remains of NI is what u get by evaluating the equation. The intuition can be strong and beautiful when u get it. I urge comrade in the fight , get it NOW!
Why this statement is correct? " FCInv - Dep is just investment in non capital asset? " FCInv = CapEx = Ending gross PPE - beginning gross PPE why the depreciation is subtracted?
I think Dep is just the only NCC in that forumla.