In a FCFE Model
Working Capital: Add if it decreased from last year and deduct if it increased and same way for Capital Exp. Why do we do this ?
Also in FCFE model u deduct the debt payment. Is the deb payment for current year ? or PV value of future debt now?
Please help
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You subtract increase in WC because an increase in WC means increase in A/R or decrease in A/P in simple terms. Increase in A/R means you are getting your cash flows later, you are selling goods but you are getting no cash flows for it. Decrease in A/P means your creditors are asking for payments sooner, meaning more cash outflows from you earlier. For change in capital expenditures you subtract when it increases because its money being spent on capital expenditures... pretty explanatory.
To get to the current years FCFE you add new debt issuance and subtract debt payments for the year. net income + depreciation -inc wc - inc capex +new debt issuance - debt repayments
remember that inventory is also part of working capital so again, if inventory increases (say, cash spent on buying up inventory) then WC increases, hence you have to subtract inrease in WC
so to summarize:
Working Cap and CapEX: when increased from last year then subtract IT and if it decreased from last year add it. both of the same concept of increase and decrease and add or deduct.
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