Question #112
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 57
Status: Unattempted
Part of Context Group: Q112-114
First in Group
Shared Context
Question
Regarding the handbook's statements on free cash flow techniques: Statement 3 Statement 4
Answer Choices:
A. Correct Correct
B. Incorrect Correct
C. Correct Incorrect
Explanation
FCFF = [EBIT × (1 – tax rate)] + dep – FCINV – WCINV
We assume that the only non-cash charge that appears above EBIT is depreciation. In
general however the rule is to adjust for any non-cash charges that appear above EBIT.
FCFF = [EBITDA × (1 – tax rate)] + (dep × tax rate) – FCINV – WCINV