December 09 Q1 Part a — OpenTuition Forums

Vvikjojo15y ago

In the kaplam text it shows that the FCF is calculated by:
PBIT + Depn - Tax = Operating flow - replacement assets - Incremental costs - incremental WC = FCF - Debt interest + Repayments + Loans raised = FCFE

However this question has used a different approach, can anyone explain why?

Many thanks

Former user15y ago#1

Hi Vikjojo,
The answer is not all that bad. They have started with operating profit before tax, then added back depreciation, taken away tax and then adjusted for incremental WC. They should then have taken away non-current asset investments to give Free Cash Fow to the Firm ("FCFFirm"). There is one mistake, though, in the tax calculation ... in calculating FCFFirm the tax should be based on operating profit only, without deducting the interest charge.
Their line that says Free Cash Flow to Equity ("FCFEquity") is not FCFEquity. To get FCFEquity one starts with FCFFirm and takes away NET interest and then one adjusts for any debt retired (negative cash flow) and any debt issued (positive cash flow).
If you want a summary of FCFFirm and FCFEquity, just give me an e-mail address and I'll send you my notes that I give to my students.
Jerry.

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