Question #74

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

Page: 36

Status: Unattempted

Correct Answer: A

Part of Context Group: Q74-76 First in Group
Shared Context
- Regarding the statements by Johnson and Nguyen about FCF in 2006: A) only Nguyen is incorrect. B) only Johnson is incorrect. C) both are incorrect.
Question
If FCInv equals Fixed Capital Investment and WCInv equals Working Capital Investment, which statement about FCF and its components is least accurate?
Answer Choices:
A. FCFE = (EBIT × (1 − tax rate)) + Depreciation − FCInv − WCInv
B. FCFF = (EBITDA × (1 − tax rate)) + (Depreciation × tax rate) − FCInv − WCInv
C. WCInv is the change in the working capital accounts, excluding cash and short-term borrowings
Explanation
The correct version of this equation is: FCFF = (EBIT × (1 − tax rate)) + Depreciation − FCInv − WCInv
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