FCFF - Calculating CAPEX

Hi,
For calculating the the FCFF, what should go into CAPEX ?
Does it include proceeds from sale of assets that were used for operations?
Doess it include the expenditures to grow operations or only to maintain operations ?

Thanks

 

You would add $100m to capex in year 3 (meaning your free cash flow is reduced by that amount in that year). Capex doesn't only include maintenance capex, it includes all changes in operating fixed assets. Since a plant is most likely used in the operations of the company the investment should be included in the free cash flow calculation.

And you would subtract net debt from the enterprise value to end up with the equity value, and yes, you subtract the current net debt. To capture the future debt increase you can adjust the cost of capital to reflect this change in leverage. This would affect the present values of the cash flows generated after the debt increase.

 

Ok i tried to fall back on first principles, and thought that for FCFF, the entire US$100m future capex will be an outflow to the equity and debt holders of the company, hence the entire US$100m is an outflow under FCFF.

Does it mean that if i use a single discount rate (eg the WACC), the underlying assumption is that this future capex will be financed at the same debt-equity proportion as today? And if i want to change that assumption of debt-equity proportion , i simply have to apply a different discount rate starting from the year of this new capex?

 
I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

I believe they should equal as they are all unwinding known accounting conventions (GAAP/IFRS).

Use interest expense and google "damadoran 25 dcf questions" and refer to Q/A #3 for the marginal/effective tax rate. Sorry, as a new member to wso, I can't post links.

 

Found about the tax rate - thanks.

All FCFF calculations should be equal but when i start with Net income - they dont. I believe i am doing something wrong in the interest expense part but for the second day i can`t seem to find what ;(

I have interest income of 1,19 and interest expense of 2,04 and taxrate of 15%. INt*(1-tax rate) should be 0,35 for all the FCFF calculations to match.

 

What happened to the debt that was taken on?

The point of taking on debt is to:

1) increase FCFF (EBITDA in the real world) through using that debt to fund growth (acquisitions, organic growth/CapEx, etc.) or

2) Provide a dividend to the shareholders

Assuming EBITDA/cash flow stayed the same, the Company would have an extra $30mm of cash on the balance sheet. That belongs to shareholders and is accounted for in a transaction.

 

Just mechanically the equity value = EV - debt + cash. So as others have pointed out, EV is the same, debt goes up 30, cash goes up 30, net debt does not change (remains 50) and therefore equity remains 50.

You said that the increase in debt will result in an increase in EV by the same magnitude. This isn't true. Enterprise Value is Equity + Net Debt (Debt - Cash). You would also potentially subtract non-cash excess assets if applicable. You can think of EV as the value of the operating business itself; the value of the operating business essentially doesn't depend on financing (OK, yes it does as a result of tax effects, but let's keep it really simple) or excess assets such as cash and securities beyond what is needed to finance operating needs. But then to value the equity/debt claims you have to take into account financing and excess assets.

 

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