Question #64
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 32
Status: Unattempted
Question
Assuming that the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by net income if:
Answer Choices:
A. non-cash charges and interest charges are equal
B. non-cash charges and interest charges are zero
C. earnings before interest and taxes (EBIT) equals depreciation
Explanation
The answer is shown by the relationship between FCFF and net income: FCFF = NI + NCC +
Int (1 – tax rate) – FCInv – WCInv. Further: FCFF = EBIT (1 – tax rate) + Dep – FCInv – WCInv,
which assumes that depreciation is the only non-cash charge.