FCFF pg 198 of CFA Equity financing, interest, because, capital, careful

RealEstate_CFA

I see in paragraph 5 any analyst should be careful in estimating the FCFF when purchases of PPE has been made with debt or even equity financing, because the cash outflows are not immediate. In the case of debt, the interest and repayments will be made later on! What do you do if the PPE is exchanged for shares with a 3rd party, how do you make an adjustment for this? There are no cash outflows.
What I also see within paragraph 7, the 2nd to last paragraph on the page, is that working capital excludes any current portion of long term liabilities because it is defined that way and I can’t help but to see a contradiction.
The repayments of PPE will be within the current portion of long term liab, so is it correct to make an adjustment and include this as outflow in the method of FCFF? What i’m trying to say, is this an overriding and more accurate way? Is just assuming all current portions of debt to be financing activity rather a shortcut but at the expense of accuracy.  By ignoring these cash outflows, aren’t you inflating cash flows, which will  artifically inflate the value of the company?
So it’s prudent to look deeper into the history of the current portion of long term debt to see whether it is financing or simply the delay of an original PPE purchase?

spartan1

Your first question is unclear. To me, CapEx is CapEx - no two ways about it. FCFF indicates the planned CapEx for that year, regardless of the financing options. If the firm plans to spend a certain amount for CapEx, it will be reflected in the FCFF while any financing decisions will be reflected in the capital structure of the firm - the WACC! Remember, don’t “double dip.” WACC and FCFF come together when you calculate the firm’s EV.
I haven’t begun the Equity volume yet, but working capital usually includes the current portion of debt. Unless, of course, interest payments were capitalized (I’m hoping you’re making the connection to the readings on Long-Lived Assets from L1 and L2). If interest was indeed capitalized, you may have to make an adjustment to the financial statements before you even get to calculating the EV, WACC, etc.
In my experience with the readings and the overall CFA material, I think the Institute tries to keep it straightforward: when it comes to calculations like FCFF or FCFE, they provide you with the current assets and current liabilities. You simply subtract them to get to working capital, without the need for adjustments you mentioned in your original post.
I hope this makes sense. Who knows, maybe I’ll be in the same boat as you when I get to page 198 of Equity - LOL.

bleach

I think you’re right, for exam purposes it will be a lot simpler than in real life and the questions will be rather basic. There definately is ways to decieve the analyst when it comes to Cash Flows, just like earnings!