I thought that EBITDA was a poor indicator for FCFF and NI was a poor indicator for FCFE. LOS H, Readin 43. I just saw a Question in a mock that has EBITDA as a poor indicator for both. Can someone please explain?
EBITDA is a poor indicator of FCFF to the firm because it doesn’t take into account investments in working capital or capital spending (the FCInv and WCInv part of the FCFF equation). Additionally, EBITDA is before interest expense and will not take into account the previously mentioned items as well as repayment/issuance of debt. Just think about the equations and how each is calculated. Basically, EBITDA = Sales - COGS - SG&A. You know the equations for FCFF and FCFE, so think thru what is included and not included in both and you can come up with the difference on your own.
Thanks…guess I just had the LOS memorized. GL
That is correct. Both are poor indicators of cash flow because they ignore the tax shield, working capital changes and other balance sheet cash items (PP&A purchases and sales)