Kaplan Qbank Question ID 1209806 - Q 36 is to calculate FCFE from Net income.
FCFE from Net Income has two formulas that must give same answer
Formula 1: FCFE = NI + NCC - FCInv - WCInv + net borrowing
Formula 2: FCFE = NI - ((1-DR)(FCInv - Dep) - ((1-DR)WCInv), given that DR = Debt/Assets
The answer is given using formula 2 and the answer is 3.8.
However, if you try to solve the question using formula 1 you’ll get different answer (which is 3.35)!!! why!!!
The given data:
- Earnings per share = €4.50.
- Capital Expenditures per share = €3.00.
- Depreciation per share = €2.75.
- Increase in working capital per share = €0.75.
- Debt financing ratio = 30.0%.
- Cost of equity = 12.0%.
- Cost of debt = 6.0%.
- Tax rate = 30.0%.
- Outstanding shares = 100 million.
- New debt borrowing = €15.0 million.
- Debt repayment = €30.0 million.
- Interest expense = €7.1 million.
Calculate FCFE for the base year