CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II
A company reports net income of 200, depreciation of 50, an increase in net working capital of 30, fixed capital investment of 120 and net borrowing of 40. Free cash flow to equity (FCFE) is closest to:
FCFE is about 140. Start with net income of 200, add back depreciation of 50, subtract the 30 working capital increase and 120 fixed capital investment, then add net borrowing of 40. The result is 140. Leaving out net borrowing would understate it at 100.
- A100
- B140Correct
- C180
Explanation
FCFE = NI + depreciation − increase in working capital − FCInv + net borrowing = 200 + 50 − 30 − 120 + 40 = 140. Omitting net borrowing gives 100; ignoring the working capital and borrowing adjustments in the wrong way (adding back 30 instead of subtracting) would give 200.
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