Ways to SCREW us with FCFF and FCFE expected, believe, future, might

badonkus

I believe the best offense, is a good defense.

When calculating FCFF or FCFE from Net Income:

Look out for Non Cash Charges besides Depreciation in the Income Statement:

Gains or Losses on Sale of PPE
Unrealized Gains or Losses on HFT Instruments
Inventory Write Downs
Asset Impairments
Deferred Tax Assets / Deferred Tax Liabilities
...can anyone else think of other NCC we might see?

Note: If it says in the vignette that the DTA or DTL are not expected to reverse in the future, I believe we can consider the DTA a loss and the DTL a gain (hopefully that won't come up)

When calculating FCInv (depending on WHAT they give --- these are all diff scenarios):

FCInv = FCInv (no, im not crazy, this is when the only info they give is "FCInv")
FCInv = CapEx
FCInv = Gross PPE (t) - Gross PPE (t-1)
FCInv = Net PPE (t) - Net PPE (t - 1) + Depreciation (t)
FCInv = CapEx - proceeds from sale of L/T assets

Remember, if they give a "gain on sale of LT assets" that is NOT what you use to calc FCINv - cause it is based on (Salvage Value - Book Value) We want the actual CASH that changed ie Company X sells PPE worth $100 which had a book value of $150, resulting in a loss of $50 (ignore taxes). But in CASH terms, FCInv actually decreased by the $100 they got for the assets, thus increasing FCFF/FCFE.

They may also lump Land into PPE, or Net PPE - seen this a few times. Land is never depreciated, so remove it from whatever PPE account you are dealing with (if they sneak it in there)

Interest (1 - tc):

Remember - if they say something like "In 2009, interest income from HTM securities was $100" - how does this impact FCFF in 2009 - remember interest INCOME reduces interest EXPENSE so = Interest (1 - tc) will be reduced

Also, if non-recurring items (cash-based) are included in Net Income, do we automatically remove them? Or is that a FSA quality of earnings type of question ...?


K that's all. Feel free to add. I bet at least one of these tricks will come up !!!