ExpertMedium2 marksMultiple Choice
ACCA · Question 07 · Business Valuations
Section A
ServicePro Ltd generated an operating profit (PBIT) of $5,000,000 last year. Depreciation was $800,000. The company invested $1,200,000 in new non-current assets and working capital increased by $300,000. The corporate tax rate is 20%.
What is the Free Cash Flow to the Firm (FCFF) for ServicePro Ltd?
Section A
ServicePro Ltd generated an operating profit (PBIT) of $5,000,000 last year. Depreciation was $800,000. The company invested $1,200,000 in new non-current assets and working capital increased by $300,000. The corporate tax rate is 20%.
What is the Free Cash Flow to the Firm (FCFF) for ServicePro Ltd?
Answer options:
A.
$3,300,000
B.
$4,300,000
C.
$3,900,000
D.
$2,500,000
How to approach this question
Calculate Net Operating Profit After Tax (NOPAT), add back non-cash charges (depreciation), and deduct cash used for investments (capex and working capital).
Full Answer
A.$3,300,000✓ Correct
Free Cash Flow to the Firm (FCFF) is the cash available to all investors (equity and debt) after taxes and reinvestment needs.
Calculation:
1. NOPAT = PBIT $\times$ (1 - T) = $5,000,000 \times (1 - 0.20) = $4,000,000
2. Add Depreciation: $4,000,000 + $800,000 = $4,800,000
3. Less Capital Expenditure: $4,800,000 - $1,200,000 = $3,600,000
4. Less Increase in Working Capital: $3,600,000 - $300,000 = $3,300,000.
Common mistakes
Forgetting to apply tax to PBIT, or treating depreciation as a cash outflow.
Practice the full ACCA FM — Financial Management Practice Exam 4
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