FCInv in FCFF Calculation

CFA Level II Equities
#1

Do we use change in Gross PP&E over the year or change in Net PP&E?

ex.

Depreciation 2012 = 100, Net PP&E 2012 = 800, Net PP&E 2011 = 700

NI 2012 = 2000, INT(1-t) = 200, WC = 50

So in our FCFF calculation (NI + NCC + INT(1-t) - FC - WC), is it FCFF = 2000 + 100 + 200 - (800-700) - 50 = 2150, or FCFF = 2000 + 100 + 200 - (800-700+100) - 50 = 2250

#2

I think the second one is correct,

given FC=PP&Eend-(PP&Ebeg-Depr)

#3

Second one. You want to back out the non cash charges.

#4

CFI is change in GFA - it’s the amount used for purchasing fixed assets. Change in NFA captures both the change in GFA and Depreciation Expense. So, if given Change in NFA, add depreciation expense. Here’s why:

GFA - Accumulated Depreciation = NFA

So, Change in GFA - Change in Accumulated Depreciation = Change in NFA

Change in Accumulated Depreciation = Depreciation Expense.

So, Change in NFA + Depreciation Expense = Change in GFA

#5

Thank you for the clarification

#6

One of the questions on the CFA mock uses net investment in FC to calculate FCFF. Check out the Alahtab scenario (AM Q3)

#7

And also, in CFAI’s explanation they used EBITDA to calculate FCFF, then used FCFF to calculate FCFE. But if you use the FCFE equation NI + NCC - FC - WC + NB you get 120 + 82.5 - 165.3 + 1.8 + 12.5 = 51.5. UGGHGHGHGHG.

#8

^ I ran into the same problem. I tried calculating the direct way and couldn’t find the answer. So I then used EBITDA to calculate FCFF then used that to calculate FCFE. There is either something we are missing or it’s a mistake by CFAI.

#9

Considering the other mistakes in the exam, I think we know the answer to that