When calculating FCFE using, FCFE = NI + NCC - FCInv - WCInv + Net Borrowing How we account for the following cases: 1) Long Term debt increased from 150 to 157.5 2) Notes Payables in creased from 15 to 20 ________________________________________ My understanding is that Net Borrowing = (157.5 - 150) + (20 - 15) = 7.5 + 5 = 12.5 Since note payables increased, it means we owe more money? Am I correct / Wrong? Thanks again!
Correct - Notes are a type of short term debt
problem is CFAI said NB = (157.5 - 150) - (20 - 15) = 7.5 - 5 = 2.5 CFAI wrong or something?
could you please point me to the chapter and the problem. Have you checked the errata ?
'11 PM mock q51
Thing I am confused about this problem and the answer provided is why you are double counting notes payable. When you calculate WCInv, you already used current liabilities (which includes notes payable). How come you include notes payable again in the Net Borrowing section?
WCInv excludes notes payable and cash.
thanks!
still confused even after loking at the bottom of book 4 pg. 393. obviously that’s for FCFF…we want FCFE o well…i giv up
Hi, We all agree with this formula : FCFE = FCFF – (1-T) Interest Expense + Net borrowing. Net borrowing = Increase in LT Borrowings - Debt repayment. In the balance sheet, the increase in note payable from one year to another (except if more information are given) correspond to the current portion of LT debt which is a debt repayment. So, back to our problem 1) LT debt increased from 150 to 157.5 = +7.5 2) Notes Payables increased from 15 to 20 = +5 (which is a repayment). Because the company borrows more in the year than it repays it will have additional funds - net borrowing - that is added to FCFF in order to determine FCFE. Then the net borrowing is 7.5 - 5 = 2.5 ! CQFD In conclusion, I think, it’s not an error. Your contribution would be appreciate if you don’t agree with this. BK
Any gain in Notes payable should be added to net borrowing not subtracted. The account is short term debt, payable within a year, which just happens to put it in current liabilities, but it still shouldn’t be in NWC. Accounts payable is the working capital liabilities account that matters for NWC. Any increase will increase the cash attributed to FCFF. Finally, I checked CFA materials, in the 2010 edition of the Equity book, pg 401, in the problem both the increase in Notes payable and increase in LT Debt were treated as net borrowing. They were added together and then added to sum FCFE.
Adding to piwanowi’s feedback, the Solution to #3 on page 407 [Volume 4 - Reading 43 - Free Cash Flow Valuation] in Example 6 clearly shows that an increase in Notes Payable increases Net Borrowing. The question asks you to find FCFE from Net Income. Net Borrowing was determined as $75M due to an increase in Notes Payables of $50M and an increase in L/T Debt of $25M.
that question got me too. usually u add increase in long term debt+increase in notes payable to get total net borrowing. in the question, notes payable is negative, that means u paied some notes during last and current year, so u would subtract them from increase long term debt
The answer set to that question definitely seems incorrect. Perhaps, we’ll find out on Monday. I found an incorrect answer set to a different mock exam question (see http://www.analystforum.com/phorums/read.php?12,1242536) which the CFAI confirmed. I asked them whether there was a document that specified the mock exam errors, and the woman I was corresponding with mentioned that there would be a supplemental document posted in the mock exam section of the CFAI website on Monday, May 23rd. From the gist of her message, it seemed like this would be a different document than the errata currently published.
So has this document been posted yet? I can’t find anything on their website.
Haven’t seen it yet. I’ve sent a message to them as to whether they are still planning to publish this document by today. Haven’t gotten a response yet.
Is there a way for candidates to complain about this kind of errata activity? I understand that at this point in preparation I’m better suited to focus my efforts on preparation as opposed to criticism, but between this and the days mistake on the swaps item set from the morning, had me just grinding and grinding and to no avail. Then 11 days before test date, we have a oops here’s a correction from the CFAI. My observation is “great can I submit a list of errata for my potential mistakes on the exam when I get home that evening, or through out the next week or month, or maybe just after I get my results??” Wouldn’t that be handy. Last year before the exam they were playing heavy metal music over hte a and screwing with the temperature level in the exam room. To me this is totally unprofessional. I don’t know I’m obviously under a great deal of stress and venting but I just wonder if others have had it with this kind of thing
thanks