Should i use the FCFF formula for this question? question, interest, possible

grharmeyer

Hi,
i have a question from qbank but i wonder if it is possible to use the FCFF formula to compute the cash flow. The answer from this qbank never include the interest expense in the calculation.
Therefore whenever i encounter this type of cash flow qns, should i use the FCFF or the what qbank recommends? Why does qbank use this method?
Is it that FCFF formula can only apply if it states to calculate the free cash flow?
I using the FCFF cash flow method for this qns which is 6+2+3 = $8 (Net income + depreciation + (interest*1tax))
=
Given the following information, compute the price/cash flow ratio for EAV Technology.
Net income per share = $6
Price per share = $100
Depreciation per share = $2
Interest expense per share = $4
Marginal tax rate = 25%
A) 8.3X.
B) 12.5X.
C) 9.1X.
Your answer: C was incorrect. The correct answer was B) 12.5X.
Cash Flow = Net income per share + Depreciation per share = $6 + $2 = $8
Price/cash flow = $100 / $8.0X = 12.5X
Thanks

hanvinh

I think because it is a price based multiple, you want to use FCFE rather than FCFF. Thus you don’t add back interest, you only add back the depreciation ie $6 + $2. Use the FCFF calculation when using an enterprise value multiple, rather than an equity multiple.