fundamentally I didn’t understand the formula: does FCFF always <= FCFE? if FCFF + Net borrowing - Interest (1-t) = FCFE Net borrowing seems always > interest (1-t) to me.
If you are confused with interest part Think like this, FCFF is measuring the entire firm and FCFE is measuring only equity holder, not debt holder. Therefore for firm basis, you need to add interest back to the firm While FCFE doesn’t need this adjustment since Ni does the job already
Sorry, didn’t read the question clearly Net borrowing not necessary always positive, since your det repayment might be larger than your borrow in that particular year
If you don’t understand FCFF I think you are in trouble…
willispierre Wrote: ------------------------------------------------------- > If you don’t understand FCFF I think you are in > trouble… what he said.
just write the formulas down over and over and over again. it takes less than thirty minutes and will give you the short term memory required. you just need to remember it past saturday at this point.
“does FCFF always <= FCFE?” FCFF is always > or = FCFE … free cash flow to the firm (debt and equity) will always be greater than or equal to free cash flow to quity (just equity)… do what skip said or else you are screwed
See if this helps! Go to remember 1 formula. Then link the formulae together. FCFF=NI+Depr+Int(1-T)-FCInv-WCInv Now CFO=NI+Depr-WcInv So FCFF=CFO+Int(1-T)-FCInv NI=EBIT(1-T) and this already contains the Interest Expense as well. So FCFF = EBIT(1-T) + Depr - FCInv - WCInv EBITDA - Depr = EBIT So EBIT(1-T)=(EBITDA-Depr)(1-T) So FCFF = (EBITDA(1-T)-Depr(1-T))+Depr - FCInv - WCInv = EBITDA(1-T) + Depr(T) - FCInv - WCInv FCFE = FCFF - Int(1-T) + Net Borrowing
Thanks a lot. kevincwang Wrote: ------------------------------------------------------- > If you are confused with interest part > > Think like this, FCFF is measuring the entire firm > and FCFE is measuring only equity holder, not debt > holder. > > Therefore for firm basis, you need to add interest > back to the firm > > While FCFE doesn’t need this adjustment since Ni > does the job already
cpk123 Wrote: ------------------------------------------------------- This might save my life, thank you very much > See if this helps! > > Go to remember 1 formula. > > Then link the formulae together. > > FCFF=NI+Depr+Int(1-T)-FCInv-WCInv > > Now CFO=NI+Depr-WcInv > > So > FCFF=CFO+Int(1-T)-FCInv > > NI=EBIT(1-T) > and this already contains the Interest Expense as > well. > > So FCFF = EBIT(1-T) + Depr - FCInv - WCInv > > > EBITDA - Depr = EBIT > So EBIT(1-T)=(EBITDA-Depr)(1-T) > So FCFF = (EBITDA(1-T)-Depr(1-T))+Depr - FCInv - > WCInv > = EBITDA(1-T) + Depr(T) - FCInv - WCInv > > FCFE = FCFF - Int(1-T) + Net Borrowing about the only formula for FCFE you need to > memorize.
I’m having trouble gathering all the components of the WCInv. It seems like I’m off everytime and its frustrating. Here are the things I’m looking at, what am I missing? 1.) Change in AR 2.) Change in Inventories 3.) Change in AP Would adding the first two and subtracting the change in AP would give you your WCInv?
heh i just lost it this morning too when i realized that i had forgotten some steps of the VC valuation process. FMLs are in order.
CF_AHHHHHHHHH Wrote: ------------------------------------------------------- > I’m having trouble gathering all the components of > the WCInv. It seems like I’m off everytime and > its frustrating. Here are the things I’m looking > at, what am I missing? > > 1.) Change in AR > 2.) Change in Inventories > 3.) Change in AP > > Would adding the first two and subtracting the > change in AP would give you your WCInv? Anyone? Please any help here would be greatly appreciated! What are the components from the balance sheet/income statement that i need to determine WCInv? Its not working out for me and i’m worried 
Total current assets, Total current liability - cash and investment. That’s WCinc
Correct, WC investment is Current assets (exclude cash and investments) - current liabilities (A/P, accrued, notes payable, etc - do not include debt). Compute the WC amounts for both balance sheet dates (If CY and PY Balance sheets are given), and the change is WC Investment. - If WC of Current year > WC of PY - WC Invstment would be a positive number and vice versa.
So basically you’re saying that i should ignore the individual components of WC and just work backwards from Total Assets and Total Liabilities? (Total Assets - Cash & Marketable Sec.) - (Total Liabilities - Debt) = WC Find this for both years, then compute the difference. The Change in Working Capital would be then same thing as WCInv for free cash flow determination?
When calculating the change in working capital, remember than any addition to an asset is a use of cash and any addition to a liability is a source of cash… and conversely, and reduction in an asset is a source of cash and any reduction in a liability is a use of cash.
Although what mcf says is correct, but its a bit lengthy process to get to the answer and time consuming, you can do this if you are constructing a cash flow statement, as there you need each item separately, for FCFF just use the overall approach would be quicker.