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Free cash flow to equity – incremental capital investment – Coedon Co (12/12)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Free cash flow to equity – incremental capital investment – Coedon Co (12/12)

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • May 15, 2018 at 4:11 pm #452097
    adolf121
    Member
    • Topics: 19
    • Replies: 39
    • ☆☆

    In the past paper question 32. Coeden Co (12/12,amended-BPP) they state that

    “Coeden Co’s latest free cash flow to equity of $2,600,000 was estimated after taking into account taxation, interest and reinvestment in assets to continue with the current level of business”

    They have clearly stated that the FCFE was found without deducting the incremental capital investment, which they later state is 40% of the FCFE.

    As I’ve learned that FCFE is found by deducting Replacement investment(to continue at current level) AND the incremental investment I found the Market value of equity by using
    2600 x .60= 1560 as the actual Free cash flow to equity in the formula:

    FCFE x (1+g) / ke-g

    But the answer shows that they have used the same 2600 as the FCFE for a year. How can this be? I thought the FCFE is all the cash available for the shareholders. How can the shareholder get 2600 if 40% of it is reinvested?

    Or are incremental investment and new investments totally different? Is so what is the difference?

    I hope I’m not bothering you with all these questions lately. Thanks.

    May 16, 2018 at 6:42 am #452207
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    I am away from home until tomorrow, and I do not have the Revision Kit with me. I do have the original exam question, but from what you have asked it seems as though BPP have changed it or added something.

    Please ask again tomorrow – then I will be home and will be able to answer you.

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  • The topic ‘Free cash flow to equity – incremental capital investment – Coedon Co (12/12)’ is closed to new replies.

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