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- Replies: 65
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Hi John,
In the bpp text it states
FCF will include “Plus Salvage Value received”
and
FCFE includes “Add Net Debt Issued(new borrowings less any repayments”
Are the above items specific to each one because “Salvage Value received” is not in the formula for FCFE and “Net Debt Issued(new borrowings less any repayments” is not included in FCF from what is in the BPP text.
I always thought the only difference between the two is one includes interest(FCFE) and the other does not(FCF) and then you will discount using either COE or the Wacc. Can you please clarify the above items if they are indeed included in both or they are specific to each one?
Thank you
Your last sentence is correct.
I don’t know why BPP implied that salvage value was in one but not the other (unless it was referred to a specific question that had a specific problem in it, which seems unlikely)- Topics: 43
- Replies: 65
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Thank you John,
And regarding “Add Net Debt Issued(new borrowings less any repayments”, is this when a company borrows money we would add this to the FCF or FCFE? never seen it as a part of a question but it seems like you would add it because you have increased cash?
New debt issued is when a company borrows money – this should be added to the FCFE (but not to the FCF).
- Topics: 43
- Replies: 65
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Why would you add it to the FCFE and not to FCF, shouldn’t FCFE be only the value of equity wouldn’t the cash gained from borrowing be debt?
It is not added to the FCF for the same reason as we don’t show it in normal project appraisal (which is effectively using FCF). We look at the flows available to finance all borrowings (equity plus debt) and discount at the WACC (the overall cost of all finance).
- Topics: 43
- Replies: 65
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Thank you john,
Regarding dividends from foreign affiliates and subs, i know you add this to the FCFE but can you also add it to the FCF?
Dear Sir,
Plz, Correct me if I am wrong on my understanding.
FCF to Firm calculation there is no involvement of Interest as It is for both Shareholders and bondholders. That’s why we are discounting it with Cost of capital.
Whereas FCFE Calculation is for Shareholders where we don involve interest but the advantage of tax yield in not incorporated. So, we are discounting it with cost of Equity.Thanks for your time and consideration.
Your first statement is correct.
However for FCFE we are after the cash flows available for shareholders and therefore interest is included (and then we discount at the cost of equity).
Dear Sir,
Sorry, to be a pain!
So, in FCFE, For tax calculation =(PBIT-Interest)* Tax Rate i.e tax shield advantage enjoying or Just including interest exp later.
My current understanding is that we gotta to do bothPlz, reply me if i am wrong at your earliest.
Thank you.FCFE is the cash available for shareholders – so it is after interest and after tax.
(And I always reply within 24 hours – I cannot sit permanently at the computer 🙂 )
Thanks a lot, Sir
I am hoping to pass this time and If I do; it will be cause all the help received from Open Tuition and You.
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