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CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models

A firm 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, all in millions of dollars. FCFF is closest to:

FCFF is about $260 million. After-tax EBIT is 500 times 0.70, or 350. Add depreciation of 80, then subtract fixed capital investment of 150 and the 20 increase in working capital, which yields 260 million dollars.

  1. A$210 million
  2. B$260 millionCorrect
  3. C$330 million

Explanation

FCFF = EBIT(1-t) + depreciation - FCInv - increase in working capital = 350 + 80 - 150 - 20 = 260. Using pre-tax EBIT would give 410. Forgetting depreciation add-back gives 180. The option 330 ignores the working capital and capital investment adjustments partially, so is wrong.

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