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Hello Mr Moffat,
Sir i came across one question in Bpp, (Q41 Fly 4000) in relation to Free Cash Flow to Equity, there was one element in which i thought should be included in FCFto equity:
-Repayment of secured loan
I did another question previously and they deducted from FCFto equity (Q64 International Enterprises (12/07)
What do you think is the appropriate way? Should we include it or just ignore it.
Thanks
There is a difference between these two questions:
With Fly you are estimating future FCFE’s and you there is no mention of repaying loans in the future.
With Int Enter you are looking at the next year and the question asks for the dividend capacity. They have projected to repay a loan next year.
its a bit confusing really because the books say FCF to the firm we don’t deduct debts but we deduct debts to arrive at the FCFE ie the net worth due to equity shares.
I was going to have treated same way as Saad.The book is correct, but so is my answer earlier. We would have deducted repayments but there is no mention of future repayments.
Dear Mr Moffat
Would you please advise why in Fly 4000 the estimated value includes present value of the latest forecast of the next 5 years with the terminal value estimated using the dividend growth model but in most of the questions, say question Wurall (June 2004), only the terminal value based on the FCF of the final year is used?
Many thanks
Hanh
But there is no final year in Fly 4000.
It continues in perpetuity (with the growth rate changing after the 5th year).
Ah, I got it.
Is it because in Fly 4000, the FCF growth of the 5 year-period (which is 6.3%/year) is different compared to the growth rate from year the 6th to perpetuity?
Mny thanks.
Hello John,
What about taxation, its not a one off cash flow, then why is it ignored?
Secondly, the reinvestment of 120.2m would also be generating a return for shareholders in future so should be a part of FCFE?Which of the questions referred to are you asking about? If it is Fly 4000 then I no longer have a copy of that question because it is not in the current edition of the BPP Revision Kit and I do not keep old Revision Kits (and it does not seem to have been a past exam question either because I have the last 20 years of past exam questions 🙂 )
Yes, Fly4000. Its a december 2006 question. As you mentioned about proceeds from sale of JV & repayment of a loan are one off & thus are not included in FCFE, but in the answer, tax is also excluded which is not a one off cash flow.
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