Hello All,
Every time, I come across this formula for FCFE, I get intimidated.
FCFE = CFO - FCInv + Net Borrowing
What is FCInv (Fixed Capital Investment)? How can we calculate this ? I didn’t see any example that asks us to calculate FCInv. Can someone please help me? This one really kills me.
Thanks in advance
FCInv is capital invested in fixed assets (i.e. PP&E) throughout the year. There are a couple ways to calculate it. The easiest way is to calculate the change in gross PP&E over the year. Another way to calculate FCInv would be: Ending Net PP&E + annual depreciation expense (or change in accumulated depreciation) - beginning Net PP&E.
Thanks. From where did you get this definition? And is there any example with a sample income statement so that this concept is clear to us? I am not sure whether FCFE is required in Level 1. I haven’t seen any examples/questions either in schweser or curriculum.
Thanks in advance.
I don’t have the level 1 curriculum… there should be an explanation of what it is shortly after their explanation of what FCFE or FCFF is… If you’re not required to calculate FCInv, it will be given to you in the question…
I just looked at my level 1 book from last year… It was covered in reading 51, Equity Valuation: Concepts and Basic Tools. The LOS from last year concerning FCFE and FCInv was “Explain the rationale…for using FCFE in valuation.” So… if it’s the same LOS, just understand that FCInv is invested capital that is not available for distribution to the providers of capital… in the case of FCFE, the providers of capital would be shareholders.
Technically, FCInv should be the investment in fixed capital required to maintain the company at its current level (e.g., to replace equipment that is worn out), but not to expand or contract. In practice, it’s frequently difficult to separate the two accurately, so people just use the total invested in fixed capital and call it square.
My pleasure.