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标题: Reading 42: Free Cash Flow Valuation- LOS i～ Q1-3 [打印本页]

作者: wzaina 时间: 2009-3-9 15:52 标题: [2009] Session 12- Reading 42: Free Cash Flow Valuation- LOS i～ Q1-3

LOS i: Critique the use of net income and EBITDA as proxies for cash flow in valuation.

Q1. Assuming that the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by net income if:

A) earnings before interest and taxes (EBIT) equals depreciation.

B) non-cash charges and interest charges are equal.

C) non-cash charges and interest charges are zero.

Q2. If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

A) earnings before interest and taxes (EBIT).

B) after-tax EBIT plus non-cash charges.

C) net income plus after-tax interest.

Q3. If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

A) net income plus non-cash charges plus after-tax interest.

B) earnings before interest and taxes (EBIT).

C) net income plus after-tax interest.

作者: wzaina 时间: 2009-3-9 15:52 标题: [2009] Session 12- Reading 42: Free Cash Flow Valuation- LOS i～ Q1-3

LOS i: Critique the use of net income and EBITDA as proxies for cash flow in valuation. fficeffice" />

Q1. Assuming that the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by net income if:

A) earnings before interest and taxes (EBIT) equals depreciation.

B) non-cash charges and interest charges are equal.

C) non-cash charges and interest charges are zero.

Correct answer is C)

The answer is shown by the relationship between FCFF and net income: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv. Further: FCFF = EBIT (1 – tax rate) + Dep – FCInv – WCInv, which assumes that depreciation is the only non-cash charge.

Q2. If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

A) earnings before interest and taxes (EBIT).

B) after-tax EBIT plus non-cash charges.

C) net income plus after-tax interest.

Correct answer is B)

The answer is indicated by the definition of FCFF: FCFF = EBIT (1 – tax rate) + Dep – FCInv – WCInv, which assumes that depreciation is the only non-cash charge. Further: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv.

Q3. If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

A) net income plus non-cash charges plus after-tax interest.

B) earnings before interest and taxes (EBIT).

C) net income plus after-tax interest.

Correct answer is A)

The answer is indicated by the definition of FCFF: FCFF = NI + NCC + Int (1 – tax rate) – FCInv – WCInv. The relationship between net income and FCFF is indicated by: NI = EBIT (1 – tax rate) – Int (1 – tax rate).

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