- If firm repurchases shares, FCFE and FCFF gow down, why? 2) If firm issues shares (and receives cash), it is not included in FCFE, why? 3) If firm issues debt (and receives cash), it is not included in FCFF, why? 4) If firm issues debt (and receives cash), it increases FCFE, why? 5) If firm pays dividends, both FCFE and FCFF go down, why? How can we show the impact of these actions directly from the formulas? FCFF = NI + NCC + INT(1-t) - FCinv - WCinv FCFE = FCFF - INT(1-t) + net borrowing
- wrong, they don’t. because this is a use of the FCFE, not the FCFE itself 2) this is the opposite of 1) so it makes sense to me that it’s not included in FCFE either - don’t have a more intuitive explanation 3) because that’s net borrowing. FCFF measures the capacity of the firm to pay debt and shareholders, so it makes sense that principal received is not part of it. 4) because that cash is available to shareholders, and it’s up to them to decide what happens with it 5) wrong, they don’t. Can you tell us where you heard that repurchases of shares or dividends decreased both FCFF and FCFE? They are both uses of FCFE, and as such do not alter it.
I’ll make some comments later, but can you cast your answers in terms of the formulas? Not as any intuitive explanations. Last month before the exam has no room for intuition, :-).
Okay. 1, 5) Dividends or repurchases of shares are not part of NI (nor NCC, INT, FCinv or WCinv for that matter. Not net borrowing either of course). Therefore, they are not part of FCFF or FCFE. 2) Same as above, actually. Proceeds from issuing shares is not part of NI or any other term. 3, 4) If you issue debt, then your net borrowing is positive, and from the formula for FCFE it is obvious that it will increase. You don’t see net borrowing in FCFF, so that will stay the same. Does that help? Probably the most important thing is that any of “repurchase shares”, “issue shares” or “dividends” does not show up in the formulas because it’s a use of FCFE, and therefore does not alter FCFE itself.
Share Repurchases, Dividends, Share issuance - no EFFECT On FCFF/FCFE. Debt Issuance / Debt repayment (Leverage change) - some effect on FCFE. FCFE reduces in the year Debt Principal is repaid due to Net Borrowing reducing - but future FCFE increases - because of lower Interest expense.
I follow you naze_duck, but I have made an explicit note from Stalla saying that paying dividends reduces both FCFE and FCFF. “Intuitively”, if your FCFE for the year is $100M, that means this is the amount of cash flow available to equity holders. Lets say you decide to pay $40M in cash divdiends, why would your FCFE remain intact? You already paid out 40% of it. The remaining $60M is your new FCFE. But lets ignore intuition in the moth of May.
cpk123 Wrote: ------------------------------------------------------- > Share Repurchases, Dividends, Share issuance - no > EFFECT On FCFF/FCFE. > > Debt Issuance / Debt repayment (Leverage change) - > some effect on FCFE. > > FCFE reduces in the year Debt Principal is repaid > due to Net Borrowing reducing - but future FCFE > increases - because of lower Interest expense. agree completely
I’ll take that back. This is same as saying that NI=$100M, and then you pay $40M in cash dividends. Still NI=$100M. Got that, but I don’t know why Stallas says otherwise.
Dreary, your FCFE is 100M no matter what you do with it afterwards. BTW, the 40M you just paid out still flowed “to equity”…
Equity_ending = Equity_begin + NI - Dividends Isn’t it removed from equity?
Yes, you’re right. I figured since it benefits the shareholders you it “kinda” goes to equity - but that’s nonsense. However, for FCFE you don’t take dividends or share issues/repurchases into account. That’s the thing to take away from this discussion.
i agree wit cpk, thats exactly what ive seen in the schweser and CFAI books. i kinda lost it when i read naze’s post on this one. thought id really forgotten what i knew to be right.