FCFE Calculation - Why do we include cash in WC?

CFA Level II Equities
#1

Hi guys,

I’m struggling with question 13 in reading 31 “Free Cash Flow Valuation”. In the problem we are asked to calculate FCFE. My question revolves around why we include cash in the working capital calculation. The problem clearly states that current assets include $5m in cash (in parentheses), and the $5m is not stripped out when we calculate WC (as equal to the change in current assets - change in current liabilities). I.e. we end up with WC = $41 and not $41 - $5 in cash. However, it also clearly states in the readings that WC is “defined to exclude cash and short term debt” in section 3.1 that’s titled “Computing FCFF from Net Income”. If anyone can shed any light, I would be most appreciative! Thanks

#2

Probably an error. WC is not suppose to include cash.

#3

That’s what I was thinking as well, but I was apprehensive about calling it out as an error before I asked about it. Wondering if anyone else noticed it?

#4

100 percent positive cash isnt supposed to be included.

#5

Is that $5 cash same for both beg and end balance sheets? If so, it just cancels out because WCInv is change in WC.

#6

Cash is part of working capital, but you don’t include it when you’re trying to explain cash flow, whether it’s FCFF, FCFE, or CFO.

#7

There we go. This explains it. Thanks everyone for the help!