Confused on CFAI EOC Question on Free Cash Flow Model

CFA Level II Equities
#1

The following question is from CFAI EOC Question 6 in Book 4: Equity - Free Cash Flow Model

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Now I tried solving the problem using the equation FCFE=Net Income + Depreciation -FCinv - WCinv + Net Borrowing, and it was sort of close but I got the wrong answer. The answer key stated that I needed to use the equation FCFE=Net Income - (1-DR)(FCinv-Dep) - (1-DR)(WCinv). Why is it that I have to use this second formula instead of trying to solve it for the first? I didn’t really see an indication that I had to solve it in this way, and in the few problems that I’ve seen this formula being used it deals with “Changes in net fixed assets” and not “investment in fixed assets” as stated in the problem. Thanks

#2

You use the second formula whenever the question is referring to forecasting, as it does in this instance.

#3

To be honest, I don’t remember seeing the second formula being used ever in any of Equity Topic Tests and due to that, pretty much forgot about it

#4

Hey now that I think about it I remember the notes saying that this formula should be applied when dealing with Forecasted free cash flows. However there was a blue box question that referred to “forecasting FCFF”, where the formula used to find FCFF was Net Income - Net FCinv - WCinv +debt financing, and the question involved forecasting FCFF with sales forecasts. Maybe the second formula should only be used when they specifically highlight the percentage of debt?

Not trying to bust balls or confuse anyone, just don’t want to make the mistake in formula for the exam.

#5

FCFE=NI-(CAPEX-DA)(1-DR)-WC(1-DR) . you only use this formula when the question give you debt ratio, or equity ratio.

#6

Thanks, was looking for this sort of clarification