FCFE Valuation (Two stage model)

[Sanjay Sachdev]

Hey guys,
Can someone please explain me why in the below equation “depreciation is netted off with FCI” ? what does the Depreciation actually means here ?
FCFE = NI - (1-Dt)*(FCI-DEP)- (1-Dt)*(WCI)

 

[MrSmart]

FCI-Dep is the net increase in fixed assets. The difference between both is the additional cash you pay over the net income cash flows. You can think of it as NI - FCI + DEP - WCI

 

[cpk123]

this is in the case of a steady state company … your investment in Fixed capital would be above and beyond the depreciation (maintenance) to be paid. So FCI - Dep = Amount of investment you would make to keep your FCI going. And you would finance that at your steady state proportion of Debt and Equity. So Equity Portion incurred = (FCI - Dep) * (1-Dt).
Similarly WCI = Working Capital Investment - also financed at your steady state proportion of Debt and Equity

 

[Sanjay Sachdev]

Thank you guys I’ve got it now !