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CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows II

A company's revenue was 400 in Year 1 and 500 in Year 2. CFO was 60 in Year 1 and 65 in Year 2. Capital expenditure was 24 in Year 1 and 40 in Year 2. Free cash flow to the firm is approximated as CFO minus capital expenditure. Using common-size analysis based on revenue, the change in free cash flow margin from Year 1 to Year 2 is closest to:

The free cash flow margin fell by about 4.0 percentage points. Year 1 FCF of 36 on revenue of 400 is 9.0%; Year 2 FCF of 25 on revenue of 500 is 5.0%. The decline comes from a lower CFO margin and higher capital expenditure intensity.

  1. A-4.0 percentage points
  2. B-2.0 percentage pointsCorrect
  3. C+2.0 percentage points

Explanation

Year 1 FCF = 60 - 24 = 36, margin 36/400 = 9.0%. Year 2 FCF = 65 - 40 = 25, margin 25/500 = 5.0%. Change = -4.0 percentage points, so the closest option is -4.0. Check: the CFO margin fell from 15.0% to 13.0% (-2.0) while capex rose from 6.0% to 8.0% (-2.0 more), totaling -4.0.

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