CA Final · Advanced Financial Management · Security Valuation
Kaveri Textiles Ltd has an FCFF of ₹100 lakh. Interest expense is ₹24 lakh, the tax rate is 25%, and the company raised net new borrowings of ₹10 lakh during the year. What is the Free Cash Flow to Equity (FCFE)?
FCFE is ₹92 lakh. Start with FCFF of 100, subtract after-tax interest of 24 × 0.75 = 18 because lenders are paid first, and add net new borrowing of 10 that is available to shareholders. This gives 100 - 18 + 10 = 92.
- A₹92 lakhCorrect
- B₹86 lakh
- C₹72 lakh
- D₹128 lakh
Explanation
FCFE = FCFF - Interest × (1 - t) + Net borrowing = 100 - 18 + 10 = ₹92 lakh. Deducting the full pre-tax interest of 24 gives ₹86 lakh, which ignores the interest tax shield.
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