Schewser SS12 Qbank Case #6 ??!!!

Am I crazy or are their table to solution for Question 6 part 2 not added up right? FCFE numbers do not add up to what they have on the table… which in turn makes answere for part 5, D rather than C??? Someone tell me I am not going crazy please

Do you have a question number N.Van?

would that be the ID# on top of the page? if yes then it’s 10205

mwvt9 do you have msn? I can send you a screenshot… I am going crazy trying to figure this out for the past 1hr…it is driving me nuts…unless I am so tierd that I am making a stupid mistake somwhere…


N.VanCandidate Wrote: ------------------------------------------------------- > would that be the ID# on top of the page? > if yes then it’s 10205 I didn’t see this. that is the questions number. Hold on.

N Van use the forecasting formulae for FCFE FCFE = NI - (1-DebtRatio) (FCInv - Depr) - (1-DR) (WCInv)

I am with rukmani, but what exactly are you having trouble with?

Perhaps you are messing up the fact that the first years FCFE is not using in the to determine the value??? Remember that the numerator is FCFE1…not FCFE0. So value in 2004 is 2005 FCFE discounted at the appropriate rate. That it? EDIT: I looked at it a little further. This HAS to be it.

I get the FCFE for 2011 correct using forecasting formula but it’s for question #5 in the item set that asks for value of the stock that I get the wrong answer which I am almost certain is correct…but due to Schewswer messing up their addition and subtraction of FCFE number they have different answer. mwvt9 I emailed you the screenshots…

See my comments above ^^

Okay I looked at it. What you are missing is the net borrowing part of the FCFE equation. You don’t see it in the table. Although it doesn’t look like it - FCFE=NI-[(1-DR)(INV-Dep)]-[(1-DR)*WC] takes net borrowing into account. To test this, add up the 2011 column the way you are adding up 2004 and then compare it to what you calculated for 2011 using the formula above. You will see the added value is 21.09 while the value you calculated was 21.89. Also notice that the calcualated number is always higher. This is due to the additional net borrowing introduced by keeping the target debt ratio of .25. So each year some of the invesment in FC and WC is done with addtional debt, which increases the net borrwing term.

The other way to see it is that FCFE=NI+NCC-FCInv-WCInv+net borrowing.

off course…OMG…I think I need a break…I knew it was something stupid…I guess if I am doing the table, one way to do it is to add 0.25 of the FCinv+WCinv at the bottom of the table (would be approximately correct)… Thanks alot…

Sure. These example help alot.

THANKS ALOT MWVT9, I have been struggling with this for over an hour…I guess its time to call it a night…or atleast a break…