FCFE Question

CFA Level II Equities
#1

This statement is false and I’m trying to find out EXACTLY why…

‘FCFE ignores company’s investment and financing policies as well as its dividend policy (true about the dividend policy).’

I definately understand why FCFE does NOT ignore investment policies (since FCFE is affected by increasing working capital or fixed capital investment). Does FCFE ignore financing policies? Does FCFF?

And which of the 2 ignore dividend policy?

Thanks!

#2

FCFE is the cash available for distribution to equity holders. It does not dictate payout rate.

If you have a FCFE of $100 there is no indication if $100, $50 or $0 will be paid out.

In that sense, FCFE ignores dividend policy.

FCFF is the cash available to the providers of capital. Same argument.

#3

Both FCFE and FCFF incorporate (FCinv) and (WCinv) in their calculations so NEITHER of them ignores these policies.

#4

thanks! what about the leverage policy? which of the 2 ignores it, if either…

thanks!

#5

FCFF ignores leverage and is unaffected by it. FCFE is affected. The following discussion are helpful.

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91340859

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91329934

http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/9991700