2 quick questions regarding effect of issuing new shares, and shares repurchase to FCFF and FCFE. I got this questions after doing the CFAI EOC 1. If we issue additional $100 of share, it says that FCFF and FCFE stays the same (no effect). This makes sense if i look at the formula for both FCFF and FCFE, since the $100 doesnt fit in anywhere. But intuitively, when a company issue $100 of new shares, surely there’s extra $100 of cash, which means FCFF and FCFE should increase by $100 too. 2. Share repurchase Same question as above, looking at formula, i agree, there shouldnt be any changes. Again, intuitively, when a company performs share repurchase, cash surely go down by $100, which means there should be less FCFF and FCFE What am i missing here? Thanks
just remember that FCF’s are cash available to investors, whereas share issuances, dividends and repurchases are uses of free cash flows. debt would affect, as interest exp lowers FCF’s available to shareholders.
nicob Wrote: ------------------------------------------------------- > just remember that FCF’s are cash available to > investors, whereas share issuances, dividends and > repurchases are uses of free cash flows. > > debt would affect, as interest exp lowers FCF’s > available to shareholders. I guess this is where i got confused. I agree with your comment that dividends, and repurchases are uses of free cash flow, thus it should be reflected in smaller figure of FCFF and FCFE, but yet it isnt.
You are confusing “use” with “amount available”. “Use” is what you do with it e.g. share repurchases and dividends. It is discretionary ( management can do whatever it wants to enhance the image of the company to owners and investors) “Amount available” ( for Firm and Equity Investors) is a non-discretionary calculation based on available cash and mandatory expenditures( WCinv , FCInc and Depreciation )
I dunno what janakisri’s talking about, it might be right, but I don’t really get that… the point is that FCFF is the money the company got that was available to shareholders and debtholders, while the FCFE is the money the company got that was available for just the shareholders. If the company decided to issue shares that year and get $100 from it, that’s fine for the company cuz sure, they get some cash, but since ‘shareholders’ have now paid $100 only to see it show up in the company’s hands, the effect of those two cancel each other out. The net value of money available to shareholders is 0. As for the share repurchase, the money the company had available for shareholders didn’t change; they just decided to do a share repurchase with it, which puts the money in the hands of the shareholders instead of them holding on to it. For example, lets say a company has $1,000 of Net Income, and FCFE of $800. No matter what I decide to do with the earnings, Net Income was still $1,000. If I decide to do a share repurchase, NI is still going to be reported at $1,000. FCFE is the same way; whether I pay it as a dividend, whether I hold it to reinvest for future periods, or whether I do a share repurchase, the company had $800 available for investors; cash flow that belonged to them. Hope that helps. suppose
Great question! I would disregard the other comments and concentrate on the following words of wisdom… Cash from share issuance actually SHOULD fit into the formula as it is written: Changes in WC SHOULD increase as Current Assets will increase without changes in Current Liabilities. BUT: the WC formula used to calculate FCFF and FCFE is different (yes, CFAI sucks!). It excludes Cash, Cash Equivalents, Notes Payable and Current Portion of LT Debt. So, the money you just threw into the company is excluded from your formula, which does make sense if you think about these FCF measures as follow…: Share repurchases are just like dividends, both of which are Cash Uses of FCF’s. They are essentially what we are trying to calculate, if we gave them out without counting them (reduce cash through dividends and exclude this money from our FCF calculations) we wouldent have a real grip on FCFF and FCFE. Share issuance on the other hand really are a new source of cash (although the end result per share may vary from deal-to-deal as we are both adding cash and diluting ownership). Its a good thing the formula excludes these as they would “gum up the works” in a few different ways. They will generally be inconsequential (as they both add and substract value) and should GENERALLY be left out of the picture.
psht. those aren’t words of wisdom. those are words of suck
Haha… How very elegant… I didn’t mean to hurt your sensibilities, I just found your comments to be slightly besides the point… Point adjacent if you will…
Point adjacent… haha! *Yawns…, goes back to making money*