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CA Final · Advanced Financial Management · Business Valuation

Which of the following correctly defines Free Cash Flow to Firm (FCFF) for a company that is valued using the DCF approach?

FCFF equals EBIT(1 - t) plus depreciation, less capital expenditure and less the increase in non-cash working capital. It is the cash available to all providers of capital, before any debt service, so it is discounted at WACC to get enterprise value.

  1. AEBIT(1 - t) + Depreciation - Capital expenditure - Increase in non-cash working capitalCorrect
  2. BNet income + Depreciation - Capital expenditure - Principal repayments + New debt issued
  3. CDividends paid + Share buybacks during the year
  4. DEBITDA - Interest - Taxes - Capital expenditure

Explanation

FCFF is the cash flow available to all capital providers, computed from after-tax operating profit: EBIT(1 - t) plus non-cash charges less reinvestment in fixed capital and working capital. Option B describes FCFE, which is after debt flows. Option C is cash actually distributed, not free cash flow.

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