# Schweser FCFE question

On page 230, question 22 from reading #47, I don’t understand what they did with the sale of equipment and fixed assets. It says: NI=50 WCInv=4 beginning gross fixed assets = 90 ending gross fixed assets= 136 Beginning Acc depr= 30 ending acc depr=40 Depr expense=27 Capital expenditures=65 Net borrowing =0 In addition, a piece of equiment with an original book value of 19 was sp;d fpr 10, which had a book value at the time of sale of 2. The gain was classified as unusual. Free cash flow to equity is? A. 6 B 10 C 18 D 27

18?

I get 10. 50-4+27-65+10-8 (gain on sale)

dont you have to take taxes out of the gain on sale? but no tax rate listed…

I remember this question because mwvt9 posted it early may…the answer is 10 but how you get that answer is still up in the air because the method used in that post was different than the way goes to eleven did it…which method is the correct one?

this may a be stupid ?.. but doesn’t NI include unusual items… thereby necessitating the “normalizing” adjustments like removing unusual items. So why would you add the gain??

I add the gain because it is a non cash item that is included in NI. Like depreciation, if it is included in NI, we have to adjust for it to get the cash flow.

Well, you would take the 50 NI + 27 Dep - 4 WC - 55 Capex minus increase in accumulated Dep - \$8 you made on the sale = \$10 That sounds about right.

mike0021 Wrote: ------------------------------------------------------- > dont you have to take taxes out of the gain on > sale? but no tax rate listed… I don’t recall any CFA questions dealing with taxes on FCFE. Dealing with taxes starting with NI for cash flow purposes is tough. Don’t get the FCF calc confused with the NPV cash flows in corp finance.

Here is the offical answer: “Recognize that the firm generated \$10 in cash and a noncash \$8 gain on the sale of equipment. Then calculate FCFE as NI plus depreciation minus the noncash gain minus FCInv minus WCInv + net borrowing: FCFE=50 + 27 - 8 - (65-10) - 4 + 0 = 10” I don’t understand where the (65-10) comes from. My reasoning is that the NI would show a a NCC of the 8 gain, so that has to be removed from the FCF as a NCC. I don’t understand how to calculate the FCInv using the fixed asset and depreciation info given. Isn’t it the change in net PPE? Where does the (65-10) come from?

You bought 65 of new stuff and you got 10 for selling the old stuff. I thought they were generous with the info in that they gave you the book value without even having to figure it out with the A/D etc.

65-10 = FCInv because it’s the net of capital spend (65) and capital receipts (10). Mike - you don’t need the tax rate because you still have the tax loss on the profit despite the fact that you’re backing out the profit on disposal. Just as you don’t back out the tax shield offered by depn, even though that’s also a non-cash item that you’re reversing.