标题: HARD QUESTION (expert level) [打印本页] 作者: badonkus 时间: 2011-7-11 19:38 标题: HARD QUESTION (expert level)
Ok guys, no peeking at notes here. This took me a while to figure out. Maybe y'all experts know this, but I consider this expert level.
Q. Tell me the difference between calculating Net Working Capital investment in capital budgeting and calculating Working Capital investment in Free Cash Flow valuation modeling. (there IS a difference, albeit slight)作者: Houjichasan 时间: 2011-7-11 19:38
for free cash flow valuation u do not consider cash and short-term debt when calculating working capital作者: economicz 时间: 2011-7-11 19:38
Haha! Nice.
What is included in "short term debt"?作者: mengxu 时间: 2011-7-11 19:38
Notes payable, the current interest payable on long term debt, etc.作者: defour44 时间: 2011-7-11 19:38
Nailed it.
This is an easy one.
Calculate FCFE using debt ratios.作者: SFoyil 时间: 2011-7-11 19:38
sorry, but this answer is not correct:
"for free cash flow valuation u do not consider cash and short-term debt when calculating working capital"
for FCF valuation you consider changes in acc. receivable, change in inventory and change in acc. payable.
so short term debt is inculded!
so the difference is only the cash component, isnt' it?作者: wizofoz 时间: 2011-7-11 19:38
great handle作者: yalo 时间: 2011-7-11 19:38
Change in AR + Change in Inv - Change in AP = the NWCInv.
If NWCInv is negative, then it is a INFLOW of cash.作者: eoin 时间: 2011-7-11 19:38
yeah i know that formula.but the question was the difference between the calculation of nwc in FCF analysis and capital budgeting作者: troymo 时间: 2011-7-11 19:38
Correct, yella, for capital budgeting it's simple: CA - CL.
Let me type in verbatim CFAI Volume IV page 385:
"Although working capital is often defined as current assets minus current liabilities, working capital for cash flow and valuation purposes is defined to exclude cash and short-term debt (which includes notes payable and the current portion of long-term debt). When finding the net increase in working capital for the purpose of calculating free cash flow, we define working capital to exclude cash and cash equivalents as well as notes payable and the current portion of long-term debt. Cash and cash equivalents are excluded because a change in cash is what we are trying to explain. Notes payable and the current portion of long-term debt are excluded because they are liabilities with explicit interest costs that make them financing items rather than operating items." (pg. 386 Reading 41: Free Cash Flow Valuation)
Hope this helps. I think it's rather important not to confuse the two fomulae.
Best in June!作者: YAhmed 时间: 2011-7-11 19:38
It all makes a lot of sense.
In capital budgeting you are trying to figure out what needs to go in and how much you'll get back, so cash going in will be an important factor.
In FCF calculations you are trying to understand how much cash the company has been able to generate.
So, (although counterintuitive) you cannot include changes in cash as it is what the rest of the forumla strives to explain (those changes in cash that result from operations will be accounted for by the rest of the formula).
Although short term debt and repayments are valid uses of cash they should be left out for FCFF as they would gum up the works. For FCFE, you will be adding them back when you add back Net Borrowings...作者: SeanWest 时间: 2011-7-11 19:38
great thanks! i love this forum for keeping the stuff present in my head!作者: kkn006 时间: 2011-7-11 19:38
Should point out that when working on capital budingeting decisions you are dealing with AFTER TAX CASH FLOWS. Therefore, the NWCInv you use DOES NOT include cash or short-term debt.
To summarize, you do NOT include Cash or Short Term Debt in your NWCInc calculation for FCFE or Capital Budgeting.作者: profil 时间: 2011-7-11 19:38
That's wrong jdane416. See above, my quote from the CFA textbooks.作者: KungFuPanda 时间: 2011-7-11 19:38
No it's not. From your quote:
"... working capital for CASH FLOW and VALUATION purposes is defined to exclude cash and short-term debt (which includes notes payable and the current portion of long-term debt)."
Find me an example from the book or Schweser where Capital Budgeting/FCFE valuation NWCInv includes Cash and Short Term Debt and I'll shut up. I'm not arguing with what you said, but for the purpose of the exam everything you deal with is a cash flow, and therefore does not include cash/short term debt.
