CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II
A company has cash flow from operations (CFO) of 500 under IFRS, which includes interest paid of 60 classified as operating. The tax rate is 25%, and fixed capital investment is 220. FCFF is closest to:
FCFF is about 325. Because interest paid was deducted in CFO, add it back after tax: 60 × (1 − 0.25) = 45. Then FCFF = 500 + 45 − 220 = 325. Adding the full pre-tax interest would overstate it at 340.
- A280
- B325Correct
- C340
Explanation
FCFF = CFO + interest paid × (1 − t) − FCInv = 500 + 60 × 0.75 − 220 = 500 + 45 − 220 = 325. Adding back the full 60 gives 340, which ignores the tax shield. Not adding back interest gives 280.
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