I am referring to Schweser Q22 of LOS42 (B4 p.235) I have 2 things to clarify: 1) In the question, it mentions “The gain was classified as unusual.” Is this a material information when deciding to “remove the equipment gain from NI”? I am thinking that even without this statement, we have to do this anyway?? 2) In the answer: FCFE = $50 + 27 - 8 - (65 - 10) - 4 + 0 = 10 My question is on the treatment of $8 (gain on NI) and $10 cash received from equipment sale. My solution here is to 1. subtract $8 (for non-cash gain) from NI 2. add $10 back for the cash received from equipment sale Why the answer put (65-10) together? If we need to group terms together, would it be more appropriate to put - (65 + 8 -10) altogether as FCInv or (-8 + 10) for adjusting the equipment sale? Although I get the same answer in all fomulas, I want to be crystal clear if I misunderstand any points here. 3) This question also recalls me the “Professor’s Note” on p.199: “… Significant nonoperating assets … should be added to this estimate to calculate total firm value. Most of the time the value of these assets is small in relation to the present value of the FCFFs, so we don’t lose much by ignoring it …” Is the “gain of the sale of equipment” one of the examples of these “nonoperating assets”? Or this note only refers to those assets like cash and land which are HELD (not related to gain/loss) for non-operating purpose? Appreciate anyone could share your views on these. Thanks!
-8 is because the sale is unusual. (65-10) ==> Capital Expenditure - Total spent by you: 65, received 10 for the Sale. So net Cap Ex = 55.
> Or this > note only refers to those assets like cash and > land which are HELD (not related to gain/loss) for > non-operating purpose? This one is the correct interpretation. Be careful with assuming cash as a non-operating asset though. Every business needs a certain amount of cash on hand for day to day operations. Only amounts in excess of this would be considered non-operating.