Question #110 - Reading 21 Free Cash Flow Valuation

Reading: Reading 21 Free Cash Flow Valuation

PDF File: Reading 21 Free Cash Flow Valuation.pdf

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Shared Context

- Calculate the forecasted free cash flow to the firm (FCFF) for 2x12, using the data in Exhibits 1 and 2. A) –89.5. B) –107.5. C) –131.5.

Question

Calculate the forecasted free cash flow to equity (FCFE) for 2x12.

Answer Choices:

A. 10.5

B. –9.5

C. –49.5

Explanation

FCFE = FCFF – Int (1 – tax rate) + net borrowing FCFE = –89.5 – 200(1 – 0.3) + 240 = 10.5 Net borrowing is the difference between the long-term and short-term debt accounts (the impact caused by amortization of premiums and discounts should be removed if debt is not issued at par): = (620 + 70) – (400 + 50) = 240 Alternatively: FCFE = NI + dep – FCINV – WCINV + net borrowing = [(415 – 200) × 0.7] + 60 – 400 – 40 + 240 = 10.5

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