Hi, when calculating FCFE, capital expenditures (fixed capital investment) has to be deducted and net borrowing has to be added. However, what about given (not received) loans? I’m working in construction company, which has many construction companies (SPVs) in their group. The company which I’m analysing regularly provides loans for other group companies. This amount is shown in Cash flows from investing activites statement. According to formula, I shouldn’t deduct given loans, but from logical point of view, given loans for group companies is kind of like investing in those companies, like investing in fixed asset. So should I eliminate given loans in such case when I’m calculating FCFE (or even FCFF)?
FCFE = FCFF - Interest expense * (1 - tax rate) + Net borrowing FCFF = NI + NCC + Interest expense * (1 - tax rate) - FCInv - WCInv FCFE = NI + NCC - FCInv - WCInv + Net borrowing
Depends on the situation. There are 2 possible scenarios. 1) If your analysis refers to that company without consolidation, I see those loans to SPVs as deduction in Net borrowing (Received loans - repayments - given loans + repayments of latters). In this case deduct the absolute amount from Net borrowing. 2) If your analysis refers to the group overall (consolidation), I see those cash flows as part of FCInv. During consolidation given loans of parent company and received loans of subsidiary will net to 0, but the subsidiary will have outflow for FCInv. In this case add the absolute amount to FCInv.
Thanks. That seems logical. thanks for clearing it up.
You are welcome.