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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 (needed to sustain growth) 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? IF so what is the difference?
I hope I’m not bothering you with all these questions lately. Thanks.
I would agree with you, and I think they should have used 60% x 2,600 in the formula (and I am certain that would have got full marks, even though obviously the final answer is different).
Kaplan states that free cashflows are cashflows that are not retained and reinvested.
Does that mean cash held which we are about to invest in NEW investments are also not free cashflows?
So, there’s no difference between incremental investments and NEW investments?
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