Question #15
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 6
Status: Incorrect
Correct Answer: A
Your Answer: C
Question
If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:
Answer Choices:
A. earnings before interest and taxes (EBIT)
B. after-tax EBIT plus non-cash charges
C. net income plus after-tax interest
Explanation
The answer is indicated by the definition of FCFF: FCFF = EBIT (1 – tax rate) + Dep – FCInv –
WCInv, which assumes that depreciation is the only non-cash charge. Further: FCFF = NI +
NCC + Int (1 – tax rate) – FCInv – WCInv.