When do you subtract cash from Working Capital???? to compute FCFE

CFA Level II
#1

while computing FCFE… the answer doesn’t not subtract cash from Current assets to arrive at WC???

I thought you subtract cash from WORKING CAPITAL ALWAYS?

#2
  1. WC

WC = CA - CL

So you subtract CL from CA to arrive at WC, right?

  1. WC Inv.

is Cash part of Working Capital Investment?

If not, why do you want to adjust WC Inv for cash?

#3

Cash is not part of wc. Leave it out of your equation.

#4

Technically speaking, Cash is a component of WC.

#5

^correct, but you’re calculating the free cash flow which is your end product. So you leave it out.

#6

When calculating fcfe and fcff only the wc computation is different. Cash is subtracted from ca, and all debt is subtracted from cl.

#7

Well, which is it? I’ve seen it both ways, on CFAI questions no less! It would make sense to remove Cash, ST Securities, and Notes Payable, since these wouldn’t seem to be “capital”, also change in Notes Payable should be reflected in Net Borrowing for FCFE, right? But when they only give you CA and CL, the best you can do is use those as proxies.

Does anyone have a definitive answer and a reason why, preferably with a source?

#8

Leave cash out of WCInv.

#9

This may confuse you more.

90% of the time WC = (Current Assets - Cash) - (Current Liablities - ST Debt (including notes payable) and CPLTD)

I don’t know if the CFAI would do this, but in real world valuation you only subtract out the Cash that is Non-Operating. A company that lets say uses a set amount of $500K cash to buy inventory etc each month. will use that and include in Working Capital.

Any non-operating cash should be added to the value you get in your analysis after (that’s how you make up for it). I think CFAI could test this point, but in all likelyhood will give you the WC number.

#10

Let’s try to settle this once and for all.

When calculating FCF:

Take out cash. current portion of debt, notes payable. That’s because you are calculating the increase in WC investment from one period to another, and an increase in cash or or short term debt is not cash spent on the daily needs of the company (i.e. inventory).

When calculating Economic Profit questions:

Do NOT take out cash, WC is just CA - CL. That’s because you are looking at invested capital in this case, and cash and short term debt are certainly part of invested capital that will require a return.

Again, my own conjecture from triangulating some really confusing data, welcom contradictions or confirmations.

#11

QFT

#12

Pretty sure this is wrong but wtvr

#13

would like to hear why wrong.

#14

B/c working capital doesn’t include cash and debt. This is why invested capital is Net Working Capital + PPE (The Net is Net cash and ST debt)

#15

First of all, what’s the difference btw WC and WC Inv?

Second of all, what’s the difference btw Net WC and WC?

#16

WC period of time, WC INV, change in WC. I probably misspoke, but net working capital is CA-CL. WC is just the CA.

I’m 90% sure CFAI will tell us change in WC. They are not testing our ability to see if we figure out how to calculate working capital.

#17

  1. WC can be CL sometimes, no matter what cash is a component.

  2. WC Inv = Change in WC EXCEPT for cash and short-term borrowings

  3. Calculating change in WC is required of Lvl 1 candidate

  4. Net WC is aka WC.

  5. BVIC = net WC + net Fixed assets = BV of debt + BV of Equity

6: FCFF you use WC Inv; EP you use WC or as you prefer to call it net WC