CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II
A company has EBIT of 500, a tax rate of 30%, depreciation of 80, fixed capital investment of 150, and an increase in working capital of 20. Free cash flow to the firm is closest to:
FCFF is 260. After-tax EBIT is 500 x 0.70 = 350; add depreciation of 80, subtract fixed capital investment of 150 and the working capital increase of 20, which leaves 260.
- A210
- B260Correct
- C350
Explanation
FCFF = EBIT(1-t) + depreciation - FCInv - increase in working capital = 350 + 80 - 150 - 20 = 260. Choosing 350 uses only after-tax EBIT. Subtracting depreciation instead of adding it gives 100... the keyed value 260 is correct; 210 results from deducting an extra 50 error-type omission.
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