Hi all, I am struggling to differentiate between USES and SOURCES of Free Cash Flows. For example, consider 3 cases below: 1) Increase common stock dividends 2) Repurchasing common shares 3) Reducing outstanding Long term debt. how do we distinguish which is which?? Please somebody help me… Thanks!
Dividends and share repurchases are both done after the fact and will not impact your FCFE calculation. FCFE will always include net borrowing as any increase in debt could potentially be used to benefit equity holders (in the form of share repurchases even though it is not a valid argument as the increased leverage raises Requity). Does that help?
thanks for reply … basically you are saying that Dividends and Share repurchase are USES of FCFE? and Reduction of outstanding debt will impact FCFE the confusing thing is the term ‘USES’ to be honest all of the 3 options sound like Cash being used, thus i keep thinking that they are all USES of FCFE… but it just seems to me now that only items that DO NOT IMPACT FCFE are considered USES> am i correct? ughh…my brain is so fried now!
Chicago, I’m not sure if this helps, but the first paragraph on page 422 in Volume 4, Reading 43 [Free Cash Flow Valuation] states that the following do not affect FCFF or FCFE: - paying cash dividends - share repurchases of common stock - issuing shares of common stock Not sure if that’s what you’re looking for, but hope it helps.
thanks for the reference…it did help clarify a little… not sure if you guys have some good tips to identify these ‘USES’ / items that can impact the FCFE/FCFF easily… somehohw I have a feeling that we’re gonna see this BIG time in the real exam… Halehlujahhh!!!
I know the feeling, right when you dont understand something, you feel it’ll be tested on the exam. Well heres the kicker: In almost every chapter, there are things i don’t understand or don’t remember, can’t assume that it’ll be tested. I’ll be fooked. infact, still have 75% of the course material to go. === Uses of FCFE = Sources of FCFE (remember this and you’ll be fine). Uses are those items, that which when added/subtracted would give you the FCFE number. Sources are those items, which gives you the FCFE number. One way I think about the sources and uses, is that USES is an INDIRECT method of computing FCFF/FCFE. and SOURCES is a DIRECT method of computing FCFF/FCFE. It’s very much like computing CFO from NI indirectly, or computing from direct method.
Chicago_Bull Wrote: ------------------------------------------------------- > Hi all, > > I am struggling to differentiate between USES and > SOURCES of Free Cash Flows. > > For example, consider 3 cases below: > > 1) Increase common stock dividends > 2) Repurchasing common shares > 3) Reducing outstanding Long term debt. > > how do we distinguish which is which?? > > Please somebody help me… > > Thanks!
* Discretionary nonoperating decisions like share repurchases and dividends are USES of FCFE (not FCFF) * Debt repayment are USE of FCFF (but not FCFE) and Debt issuances are SOURCES of FCFE (not FCFF). This help ?