Formula for FCFE

CFA Level II Equities
#1

Hello there,

Just a quick question, I am sure there is a very simple answer!

I have seen two formula’s for calculating FCFE from NI, that are confusing me.

  1. FCFE = NI + Depreciation - FCInv - WCInv + NB

  2. FCFE = NI - (1 - DR)(FCInv - Depreciation) - (1 - DR)(WCInv)

I would just like to know why there are two formulas and when we should be using them.

Many thanks,

Jamie

#2
  1. FCFE = NI + Depreciation - FCInv - WCInv + Net borrowing

–> you can use this formula to derive FCFE for the current period. Other formulas that are important to know include:

a) FCFE = CFO - FCInv + net borrowing

b) FCFE = FCFF - Int (1 - tax rate) + net borrowing

  1. FCFE = NI - (1 - DR)(FCInv - Depreciation) - (1 - DR)(WCInv)

–> This formula is used when you have to predict FCFE. So when the text states “analyst X would like to forecast/predict FCFE for the next period”, you will have to use this formula.

I have personally only come across this formula once, so I would not know how important it really is.

#3

That is great - thank you so much.