CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models
A firm's FCFF is 300 and interest expense is 40, with a tax rate of 25%. Net borrowing during the year is 50. All figures are in millions of pounds. FCFE is closest to:
FCFE is about £320 million. Subtract after-tax interest of 30 (40 times 0.75) from FCFF of 300, then add net borrowing of 50. The result is 320 million pounds. Adding the interest instead would wrongly give 380.
- A£280 million
- B£320 millionCorrect
- C£380 million
Explanation
FCFE = FCFF - Int(1-t) + net borrowing = 300 - 40(0.75) + 50 = 300 - 30 + 50 = 320. Ignoring the tax shield gives 310 (not offered), and adding rather than subtracting after-tax interest gives 380. Omitting net borrowing gives 270.
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