I searched for a thread on this and couldn’t find one, sorry if its been discussed elsewhere. On the mock 2 question where CFAI used 50% debt instead of the 40% they should have, they also applied that percentage to just the fixed capital outlay but not the increase in working capital. Is that also wrong? If you are financing a project with debt, do you include the entire initial outlay or the initial outlay - increase in NWC? Thanks
You include it all. You are financing that increase in Net Working Capital partly with an increase in debt, so you apply the target debt ratio to it.
It is discussed here: http://www.analystforum.com/phorums/read.php?12,726376,752487,page=3#msg-752487 Appears it is a mistake.
But the mock exam didn’t include it. So you’re saying CFAI was wrong TWICE in the same question???
you include it in the initial outlay, but you don’t depreciate it
mwvt9 Wrote: ------------------------------------------------------- > It is discussed here: > > http://www.analystforum.com/phorums/read.php?12,72 > 6376,752487,page=3#msg-752487 > > Appears it is a mistake. mwvt - that’s a different discussion from this one…that thread talks about the FCFF calculation - here the confusion is about getting to the accounting income… Just to summarize - there seem to be several mistakes on this one… 1. They are supposed to be using 50% debt instead of 40% (according to the answer) 2. When calculating the accounting income - to get the interest expense they take 50% of the Initial Outlay - the confusion is whether Initial Outlay should include the Increase in WCInv or not… IMO it should - if it shows up on the exam though I dunno what i’ll do - considering the mock did not include it…someone else want to confirm that!!? 3. When calculating the FCFF, the use the total Capital Expenditure. Ideally they should be using FCInv (which is Capex - proceeds from sale), however in this question, they do not include the proceeds from sale- IMO- Proceeds from sale have to be deducted from the Capex - ALL other examples use that methodology - this particular question had to be a mistake…
My bad. I just took sample 3 yesterday and question 14 was about accounting income. It was a 38M dollar project that required a 1M increase in WC. When they figured out interest expense they did NOT use the 1M of WC in the calculation. EXPLANATION!!!: There explanation specifically says for accounting income to IGNORE the WC. If you have taken sample three look up the explanation for the question. I am too nervous with ethics rules to post it here.