Hello,
Can you please let me know if the negative sign on Notes payable and Long-term financing issuances represents an increase or decrease in financing activity?
using the equation
FCFE = FCFF − Int(1 − Tax rate) + Net borrowing
= 155 − 60 + 75 = $170 million
Image : CFAI book 4 pg 303
Normally, cash inflows are positive; cash outflows are negative.
However, here the conclusion is cash used for financing activities, which they show as positive, and they show dividends (paid, presumably) as positive. So here, for financing activities, they’re showing cash inflows as negative and cash outflows as positive.
It’s stupid, but that’s what they’re doing.
Where did you get this question?
Thank you for the reply.
The question is from CFAI book Equity Pg 303 Example 6 : Adjusting Net Income or CFO to Find FCFF and FCFE.
Gotcha.
It’s weird. The only way I figured it out was to notice the sign on dividends (paid), and then to see “used for” financing activities.
Read carefully, my friend.
Hence, we add a positive amount of Net Borrowing to FCFE because that number is simply cash that has flowed to equity owners. Never mind the firm borrowed the cash and did not earn it.
