CFA Level IFinancial Statement AnalysisMedium
A company reports net income of $150,000, depreciation expense of $50,000, interest expense of $40,000, an effective tax rate of 30%, capital expenditures of $80,000, and an increase in working capital of $20,000. What is the company's free cash flow to the firm (FCFF)?
- A$100,000
- B$120,000
- C$128,000
- D$140,000
Show answer & explanationAnswer & explanation
Correct answer: C. $128,000
FCFF = NI + Net non-cash charges + Interest expense × (1 − tax rate) − FCInv − WCInv = $150,000 + $50,000 + $40,000(0.70) − $80,000 − $20,000 = $150,000 + $50,000 + $28,000 − $80,000 − $20,000 = $128,000.
Why the other options are wrong
- A. This omits the after-tax interest add-back.
- B. This uses pre-tax interest instead of after-tax interest.
- D. This fails to subtract the increase in working capital.
Free Cash Flow to the Firm (FCFF)
FCFF is the cash flow available to all capital providers (debt and equity) after accounting for operating expenses, taxes, and investments in fixed and working capital.
- FCFF = NI + NCC + Int(1−t) − FCInv − WCInv
- Represents cash available to all suppliers of capital
- Used in firm-level DCF valuation
Memory trick: Start with NI, add back non-cash and after-tax interest, subtract investments.