CA Final · Advanced Financial Management · Security Valuation
Sundaram Auto Components Ltd reports EBIT of ₹200 lakh for the year. The tax rate is 25%. Depreciation is ₹40 lakh, capital expenditure is ₹70 lakh and the increase in net working capital is ₹20 lakh. What is the Free Cash Flow to the Firm (FCFF)?
FCFF is ₹100 lakh. Tax-adjusted operating profit is 200 × 0.75 = 150. Add back non-cash depreciation of 40, then deduct capital expenditure of 70 and the working capital investment of 20. The result is 150 + 40 - 70 - 20 = 100.
- A₹100 lakhCorrect
- B₹150 lakh
- C₹60 lakh
- D₹240 lakh
Explanation
FCFF = EBIT(1 - t) + Depreciation - Capex - Increase in NWC = 150 + 40 - 70 - 20 = ₹100 lakh. Taking EBIT without deducting tax gives ₹150 lakh, which is wrong because FCFF must use after-tax operating profit.
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