FCFE and FCFF…good lord. Especially the end of reading questions in the CFAI book. Can anyone impart some wisdom on myself and the others; something to make this section a little more manageable. cpk, you are encouraged to continue your dominance here…
What exactly is your question? I’m fairly decent in this arena…FCFF is what cash is generated for the entire benefit of the firm, whereas FCFE is the cash generated after FCFF is reduced by debt payments. I do this for a living, so I could probably answer whatever questions you might have, so just let me know.
I almost puked a couple days ago when I reviewed that SS, just couldnt get the formulas in my head. Then, after a day of staring at them, talking thru them, and writing them a couple of times it clicked. Once you know those formulas the rest is just like the previous section on GGMs, valuation isn’t too bad. There is no way around it, you need to know those formulas before you can do anything. swear…breathe…refocus… FCFF=NI+NCC+(Int*(1-tax rate))-FCInv-WCInv…like riding a bike…you can do it
I’d actually disagree with that, tvPM - of course I’m biased as I do this countless times a day, but I actually don’t know any of the Schweser formulas - just think of what transactions actually influence cash generation or burn off of the financial statements and you can solve any of the problems, even if you forget the formulas on exam day. I wouldn’t recommend trying to memorize all fifteen or so of those formulas - just know the basic concepts and you’re fine; however, to each his/her own.
Those formulas are hard? Have you guys gone through FI and derivatives by any chance?
I agree, the formulas are ridiculous. I did memorize the basic NI + NCC +Int(1-t) - FCInv - WCInv formula but otherwise I just think about what makes up the inputs they give us and work from there. As long as you remember what is/isn’t in CFO, EBITDA, etc then you its not too hard to figure out. For FCFE I just calculate FCFF first and then adjust for the debt… no formulas needed.
Its too hard for me to try and answer a question on what the value of an equity is when they give me a bunch of random information, can’t sort thru it like you can, I like the structure of knowing that I treat Deprec like this, Interest like this, etc. I would just know I would stumble on not treating interest expense properly and come up with a wrong value for FCFF… If I had that experience I would probably feel pretty good, but unfortunately I am keeping those formulas in my head knowing I can plug figures in and come up with the answer. The bottom liine is you either need to know the formulas and inputs or you need to know how to classify transactions, either way there is no way around this SS. I’d take it over FRA anyday, however, and don’t talk to me about Residual Income…
Dreary - I don’t think the problem is that they’re hard, just that there’s 10 ways to derive them.
the formulas are pretty intuitive if you talk thru them, agree with Aimee that you can know what to include or exclude if you think about it, but knowing those 8 formulas is not a big deal compared to some in derivatives…those are just gross with all those letters, special characters, exponents, blehhhhhh
I’ve just taken the time to memorize all the formulas. FCFF & FCFE.