Accounts receivables increase by $100 (tax 40%) How will it impact on FCFF/FCFE? Will it decrease by 100? Or by 40? My thought: in case of increasing AR we recognize revenue in IS, So revenue is up by 100, Net income is up by 60 In CFS we substract AR, so CFO is down by 40 -> FCFF/FCFE down by 40? Am I wrong?
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Trade A/R is working capital. It seems intuitive that assigning new A/R would not decrease FCFF, unless there is a reason to downgrade the asset (i.e contra accouts). But I could be wrong.
You are right. EBIT(1-T) is up by 60. Change in NWC is up by 100. FCFF is down by 40 (60-100). FCFE is also down by 40 as A/R and revenue recognition have no impact on financing of the company.
CFA lvl 2 curriculum says that both CF go down by 100. If Accounts payables increase by 100 then it states that both CF increase by 100. Is it a mistake in curriculum?
The question in the thread referred to accounts receivables, not to accounts payables. Changes in A/P is a different thing. In your case just look on the components. A/P has gone up by 100. (which means you did not pay someone 100). Change in NWC is -100. Any other changes? No. No revenues are recognised, that is no impact on EBIT. No aditional capex and no changes in depreciation.
FCFF = EBIT(1-T) + D - change in NWC - CAPEX.
---> change in FCFF is +100.
Changes in A/P do not affect financing, therefore change in the FCFE is also +100.
CFA lvl 2 curriculum is right.
But once again, it is not what was asked in the thread.
I also bumped into the same question, and I have doubts about the validity of the solution as well. As per the solution, a 100 increase in A/R will result in a -100 to FCFF and FCFE, which doesn't seem to be correct.
He asked about accounts payable.
Pay attention, there are two questions here. - The main question, about AR. FCFF and FCFE decrease by 40 - The subseuqent question: he quotes CFA curiculum with "accounts payable". +100 in AP leads to +100 in both FCFF and FCFE.
Good luck.
[Corrected below]
Wait, if A/P goes up $100, wouldn't EBIT go down by $60? Usually, AP would go up because there was an expense recorded on the IS. The way I see it is:
IS: NI decreases by $60 net of tax SOCF: NI decrease of $60 is offset by an increase in AP, resulting in an increase in cash from ops of $40 BS: L/E: AP goes up $100, E decreases by $60 for a net effect of $40. A: Cash increase of $40 per SOCF keeping it balanced.
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