what to do with preferred dividends in fcff fcfe?

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mehdizaman

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when calculating based on NI preffered dividends willl be added for FCFF but for FCFE they will be subtracted! consider them as interest and treat them as such too.
when using EBIT or EBITDA this problem is already eliminated.
 
My $0.02
FCFF: Add preferred dividends *(1-t) back to NI
FCFE: No adjustments to NI since preferred dividends have alread been deducted. If new preferred shares issued during the year add the amount since it is available to common equity holders.
 
kc123 wrote:
My $0.02
FCFF: Add preferred dividends *(1-t) back to NI
FCFE: No adjustments to NI since preferred dividends have alread been deducted. If new preferred shares issued during the year add the amount since it is available to common equity holders.
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IMO we do not adjust pref dividents by taxes. Just add them back to FCFF.
 
Am I missing something here? when are preferred dividends accounted for in net income?
 
mehdizaman wrote:
Am I missing something here? when are preferred dividends accounted for in net income?
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they are not reflected in NI. dividents are below NI, but are taken into account when calculating FCFs
 
Agree that preferred dividends should not be tax adjusted. Although they are viewed like debt, it is not tax deductible.
 
I re-checked. You guys are right
FCFF = NI + NCC + Int(1− Tax rate)+ Preferred dividends − FCInv − WCInv

Pref div are below the line…
 
that is what I thought! we will treat preffered dividends as interest payments in both cases except we don’t net it for tax as there is not tax benefit to the firm (preffered dividends provide a tax benefit to the investor).
also how will we adjust FCFE for preferred dividends?
my oppinion is it will be subtracted from the NI
 
THIS IS IN THE BOOK
If preferred stock dividends have been paid (and net income is income available to common shareholders), the preferred dividends must be added back just as after-tax interest expenses are. The modified equation (including preferred dividends) for FCFF is
FCFF = NI + NCC + Int(1− Tax rate)+ Preferred dividends − FCInv − WCInv
If the company has preferred stock, the FCFE equation is essentially the same. Net borrowing in this case is the total of new debt borrowing and net issuances of new preferred stock
 
elenayhg wrote:
THIS IS IN THE BOOK
If preferred stock dividends have been paid (and net income is income available to common shareholders), the preferred dividends must be added back just as after-tax interest expenses are. The modified equation (including preferred dividends) for FCFF is
FCFF = NI + NCC + Int(1− Tax rate)+ Preferred dividends − FCInv − WCInv
If the company has preferred stock, the FCFE equation is essentially the same. Net borrowing in this case is the total of new debt borrowing and net issuances of new preferred stock
Click to expand...
thanks man, FCFE calculation confused me, this solves it!
 
Also remember to adjust FCFE for issuing and redeeming preferred dividents.
 
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