# FCFF & FCFE clarifications

1. If cash operating expenses are up 100, then what is the effect on FCFF & FCFE? Is it the same as saying CFO is down 100?
1. How do compute the Working capital investments. Pls identify the impact on Working Capital investments for the following. Ac/Receiveables goes down Ac Payable goes up Inventories goes down. Accrued taxes and expenses goes up. After you’ve answered this question, try solving problem 2 of the FCFE chapter 43. Is book correct in the solution? I am losing my mind.
1. it is not the same as saying CFO went down because… is someone told you CFO went down by a 100, well CFO went down by a 100! By if they told you expenses went down by a 100. Thos expense are gona lower your tax bill be 100(T). So I would compare it to CFO going down by 100-(100*T) 2) How do compute the Working capital investments. Pls identify the impact on Working Capital investments for the following. Ac/Receiveables goes down /rec go down, meening you collected money, so investment down Ac Payable goes up /payables go up, meening you are owing more money, so thats cash flowing in, so investment down Inventories goes down. /invesntories went down, you liquided those inventories and got some money back, so your investment went down Accrued taxes and expenses goes up. /accrued expenses are going up, it meens you are paying less of your expenses using cash, you are kind of delaying paying them, so you can think of that as inflow and thus investment went down as well ------------ question 2 is FINE… if you want try to think of the components of net working capital one by one, dont sum it up in a big number that gets you lost invenstory went up by 39, so thats an investment of 39 done by the firm so -44 ar went up, so you are loaning people money, thats an investment of 39 so -39 payables went up, thats like borrowing, you you getting cash in so+22 accrued expenses went up, so you are paying less, inflow so +23 you can either subbtract 44, then subtract 39, then add 22, then add 23 (thats how i do it) of you can do -(39+44-22-23) same thing math wise, but some people tend to get lost and forget the effect of the minus outside the bracket

if acs receivable are down 39, shouldn’t that INCREASE WORKING CAPITAL? because you collected 39 from your debtors. if inventory is down 44, shouldn’t that INCREASE WORKING CAPITAL? same reason, you liquidated your inventory worth 44 so you have more money. if ac payable is up, then you didn’t pay cash you were supposed to pay, so it should increase your working capital. if accrued exenses then you didn’t pay expense that you have to pay, so it should increase your working capital. so in my opinino, the net increase in working capital requirements was -(39+44+22+23) = -128. so while solving problem 2, i added -128 to the FCFF … and i need an explanation of why this is incorrect. I know its wrong but i need the true reason behind it. someone pls help.

we are trying to compute the net increase in working capital. working capital = current assets - current liabilities. so if current assets go up, working capital goes up. if current liabilities go up, working capital goes down. in problem 2, current assets are going down (39+44), however current liabilities are going up, (22+23) so assets going down should bring your working capital down, liabilities going up should bring your working capital further down. so net decrease in working capital of 128. this is confusing me, someone pls try to explain this, what am i doing wrong?? this thing is bothering me big time.

Ok, nevermind I just found out the trick in this problem. a negative adjustment for ac receivable in STATEMENT OF CASH FLOW == increase in ac receiveable in BALANCE SHEET. level 1 stuff, but very very tricky. glad i finally understand this. its an eureka moment. What i was saying is pretty much correct all this time. just exercise caution when computing the components of working capital, better to focus on balance sheet. but if you must focus on CASH FLOW STATMENT, then better know when to switch sign.

For the WC portion of the calculation, I look at it in terms of the “Change in Working Capital” between 2007 to 2008: So WC = CA - CL 2008 WC: AR + Inv - AP - Accrued Taxes/expenses = 513+564-317-99 = 661 2007 WC: AR + Inv - AP - Accrued Taxes/expenses = 474+520-295-76 = 623 Thus: The Change in WC is 661 - 623 = 38 So FCFE= NI + Depreciation - FCInv- WCInv + Debt = 285+180-349- (38) + (10+40) = 128