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LOS i: Critique the use of net income and EBITDA as proxies for cash flow in valuation. ffice ffice" />
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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发表于 2009-4-29 13:05
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