FCFF CFO Question

CFA Level II
#1

Hi friends, Let’s suppose I’m calculating FCFF using the formula, FCFF = NI+NCC+Int*(1-tax rate) - FCInv - WCInv I know that WCInv is not to include cash, short-term debt, and the current portion of long-term debt, as these items are considered financing cash flows and not operating cash flows. Under US GAAP, interest paid is defined as _operating_ cash flow. So let’s say I’m using the following formula for FCFF: FCFF = CFO + Int*(1-t) - FCInv CFO would include an adjustment for an increase or decrease in notes payable under US GAAP, since it should be classified under operating cash flows. My question is, does this mean I have to make an adjustment to the CFO version of the formula to reconcile the CFO version to the net income form under US GAAP (and possibly IFRS since it is discretionary on whether financing or operating cash flow is chosen)?

#2

Nevermind, I’m stupid

#3

increase or decrease in Notes Payable would be a repayment of Principal or addition of Principal. And will not be classified as CFO, but as CFF, wouldn’t it? Or am I missing something here?

#4

I realized that as soon as I posted it. I was confusing interest payments with repayment of principal. Thanks for verifying CP :stuck_out_tongue:

#5

you guys think there is any reason to memorize all those formulas for FCFF besides the basic one starting from CFO? I mean if they give us EBIT we can get to NI and hence CFO, same with EBITDA. I find i’m messing these up, and end up just getting to CFO first regardless of what I’m given.

#6

I kind of remember it like this: 1. Start with the NI formula NI + NCC + Int(1-T) - FCInv - WCINV NI = EBIT(1-T) = EBIT(1-T) + Depr - FCInv - WCInv EBIT (1-T) already includes INT(1-T) = EBITDA(1-T) + Depr * T - FCInv - WCInv EBITDA(1-T) includes Int(1-T) and includes Depr(1-T) so to get to DEPR need to add DEPR(1-T) NI + NCC - WCInv = CFO So FCFF = CFO + Int(1-T) - FCInv Then FCFE = FCFF - Int(1-T) + Net Borrowing

#7

yeah that makes sense. I gotta get out of just trying to memorize this stuff and understand it, because it all makes sense when you step back and think about it.