Question #121
Reading: Reading 21 Free Cash Flow Valuation
PDF File: Reading 21 Free Cash Flow Valuation.pdf
Page: 61
Status: Unattempted
Correct Answer: B
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. net income plus non-cash charges plus after-tax interest
C. net income plus after-tax interest
Explanation
The answer is indicated by the definition of FCFF: FCFF = NI + NCC + Int (1 – tax rate) –
FCInv – WCInv. The relationship between net income and FCFF is indicated by: NI = EBIT (1
– tax rate) – Int (1 – tax rate).