In an item set the following information was given:
Increase in receivables 25
Increase in inventories 40
Decrease in payables 15
Net Capex 42
Increase in LT Debt 150
Calculate FCFE (Net income 75)
In the solution all the components of the working capital have been subtracted. So essentially, 75 + 35 (depreciation) -25 -40-15 (WC) - 42 (Capex)+ LT Debt (150)
=138. What I wanted to know is why all the components within WC were subtracted away when some of them increased and payables decreased
@Biuku why have you added the components of NWC capital together. This totals 80 when the solution suggest WC is -30.
To clarify @Jlion:
In the example above, A/R increased by 25. You have suggested this is an outflow of money, then why is the 25 not negative? I thought cash had no impact on Working Capital.
Increase in inventories is deducted and the decrease inpayables (which means we are retaining more cash) is deducted too?
FCFE = NI + Dep/NCC + Net Borrowing - FCInv - WCInv
WCInv = NI + Dep/NCC + Net Borrowing - FCInv - FCFE
WCInv = 75 + 35 + 150 - 42 - 138
WCInv = 80
80 = (25 + 40) - (-15)
Don’t think of FCF as a following rules. Think of it as archaelogy – you found a 65M year old tooth in Vietnam, and it fits a 67M year old jaw found in Japan. How tall is the dinosaur?
The financial statements are fighting against you, if you’re trying to determine how much actual wealth you can generate from the company. You’re using agility in financial statements to create something outside them that is useful to a person who might buy the company.