WCInv

CFA Level II
#1

do we include current assets and liabilities in calculating WCInv? Thanks

#2

I think this is the formula: WC Inv = (A/R (t) - A/R(t-1))+(Inv(t)-Inv(t-1)) - (A/P(t)-A/P(t-1))-other current liabilities

#3

Yes, that is part of the definition of WCInv. But you only use NON-CASH CA & NON-DEBT CL. WCInv = change(non-cash CA) - change(non-debt CL)

#4

WCinv = Current assets - current liabilities - cash - short term debt you exclude cash and short term debt when working for cash flow and valuation purposes (like finding FCFF)

#5

other peoples explanations seem complicated, but i hink we are all getting at the same thing… See page 359 in CFAI Equity for further clarification

#6

CFAdreams Wrote: ------------------------------------------------------- > WCinv = Current assets - current liabilities - > cash - short term debt > > you exclude cash and short term debt when working > for cash flow and valuation purposes (like finding > FCFF) yes. No cash and no s-t debt.

#7

I was looking at Schewser eg on page 208 (free cash flow valuations-equity). In that eg, current assets are not included in calculating WCInv?

#8

i guess if it is whatever you want to use… If the CFAI didnt send you a copy of their books, I guess you cant turn to page 359 of equity and read the paragraph at the bottom of the page… Go with Schweser, they have a better understanding of the core curriculum than CFAI…

#9

> WCinv = Current assets - current liabilities - cash - short term debt I don’t think this is correct. Assume cash is zero and you see it is not correct.

#10

echoing CFAdreams: from p. 359 of CFAI Equity text: “Although working capital is often defined as current assets minus current liabilities, working capital for cash flow and valuation purposes is defined to exclude cash and short-term debt (which includes notes payable and the current portion of long-term debt)…Cash and cash equivalents are excluded because a change in cash is what we are trying to explain. Notes payable and the current portion of long-term debt are excluded because they are liabilities with explicit interest costs that make them financing, rather than operating, items”.

#11

> WCinv = Current assets - current liabilities - cash - short term debt We can fix it like this: WCinv = delta Current assets - delta current liabilities - delta cash - delta short term debt

#12

WCinv = delta(CA - CL - C - STD)

#13

I think they way everyone is looking at working capital is how it changed from one year to the next. Hence “WCinv = delta(CA - CL - C - STD)” The way I look at it is from an FCFF standpoint, which is the only way i could see working capital popping on the test. FCFF isnt concerned about the change in working capital from one year to the next. It is concerned with the ending working capital. FCFF = NI + NCC + Int(1-tax) - FCinv - WCinv All of the factors (NI, NCC, Int(1-tax rate), FCinv, WCinv) are supposed to be the year ended or income statement amounts. Anyone knows any other way they will shove workign capital invested on this test?

#14

CFAdreams, just put here an example here and I wil show you that you wil mess up big time on the exam. Deal?

#15

Dreary, i will look for an example later after work and we can discuss… My understanding very well could be wrong, but i really think i am pulling what i am saying right from the book… So I would appreciate any insight on an example later…

#16

I just looked up one example (at random), and if you just take end of year values for CA - CL - cash as you indicated, you get something completely wrong. They have to either give you the change in each item, or they will give you the final number as WCinv. This is why I wanted to point this out, so you and others don’t make a simple mistake on the exam. Run some examples and see if you agree. Cheers.

#17

I was just looking at one specific one from a sample or mock that says WCinv will be 10% of EPS… I am used to seeing it given this way. But I will definitely look for a problem tonight where they want me to find WCinv given 2 years of balance sheet… Thanks for the helpful input… Would have def been an easy point that i know how to do that i would get wrong if it comes up…