Which of the following items is NOT subtracted from the net income to calculate free cash flow to equity (FCFE)? A) Subtractions to notes payable. B) Additions to cash. C) Interest payments to bondholders. Your answer: B was incorrect. The correct answer was C) Interest payments to bondholders. Interest payments to bondholders are included in the income statement and are already subtracted to calculate net income. ---- Why is B) not a correct answer? FCFE = NI + Dep + NB - FCinv - NWC C) Interest payments to bondholders - clearly not subtracted in FCFE equation, so this is the right answer A) Subtractions to notes payable - this means you are returning some principal and thus it is a reduction of cash and a decrease in NB-- this IS subtracted from NI --> wrong answer B) Additions to cash - this means you are borrowing, so NB goes up and thus, this item is NOT subtracted from FCFE --> seems like a right answer So seems like B can be the right answer too, since an addition to cash is not subtracted from NI in the FCFE formula.
Additions to cash does not necessarily mean you are borrowing. What if a customer paid off one of their invoices? You would debit cash and credit A/R. C applies in all situations.
bpuldog you are correct. an addition to cash can be due to anything—related to NB or not. however, there is no circumstance (whether the addition to cash is related to NB or related to something else) where the addition to cash would decrease FCFE. just loook at the formula. so choice B seems to fit the answer just as choice C does.
No it does not. NI already has the after tax Interest deducted . ( i.e. Subtracted ) . If you SUBTRACT after tax interest AGAIN , you would double undercount After tax interest costs. correct answer is C .
janakisri, i see why C is the right answer. i dont see why B is wrong. can you provide an example of when an addition to cash WOULD be subtracted from NI to calculate FCFE
Cash and Cash equives are excluded from NWCInv in FCF equations, so cash can increase,decrease, or stay the same and it would have no effect on any FCF measure.
the show NY Wrote: ------------------------------------------------------- > janakisri, > > i see why C is the right answer. i dont see why B > is wrong. can you provide an example of when an > addition to cash WOULD be subtracted from NI to > calculate FCFE There will be questions where 2 answer choices will be correct, but one is the better answer.