Reading 47: Free Cash Flow Valuation - LOS i ～ Q1-3 class, investment, capital, black

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

A)   net income plus after-tax interest.

B)   earnings before interest and taxes (EBIT).

C)   free cash flow to equity (FCFE).

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

2.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 after-tax interest.

B)   earnings before interest and taxes (EBIT).

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

D)   free cash flow to equity (FCFE).

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

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

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

D)   net income exceeds after-tax interest.

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答案和详解如下：

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

A)   net income plus after-tax interest.

B)   earnings before interest and taxes (EBIT).

C)   free cash flow to equity (FCFE).

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

The correct answer was D)

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).

2.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 after-tax interest.

B)   earnings before interest and taxes (EBIT).

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

D)   free cash flow to equity (FCFE).

The correct answer was C)

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.

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

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

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

D)   net income exceeds after-tax interest.

The correct answer was 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.