ExpertMedium2 marksMultiple Choice
ACCA · Question 07 · Business Valuations
Section A
GridConnect PLC, a cross-border renewable energy operator, has generated Operating Profit (PBIT) of $40m. Depreciation for the year was $8m. The company invested $12m in new non-current assets and working capital increased by $3m. The corporate tax rate is 25%.
What is the Free Cash Flow to the Firm (FCFF) for the year?
Section A
GridConnect PLC, a cross-border renewable energy operator, has generated Operating Profit (PBIT) of $40m. Depreciation for the year was $8m. The company invested $12m in new non-current assets and working capital increased by $3m. The corporate tax rate is 25%.
What is the Free Cash Flow to the Firm (FCFF) for the year?
Answer options:
A.
$15m
B.
$23m
C.
$33m
D.
$41m
How to approach this question
Calculate NOPAT (Net Operating Profit After Tax) by taking PBIT * (1-tax). Then add back non-cash expenses (depreciation) and subtract cash outflows for investments (CapEx and Working Capital increases).
Full Answer
B.$23m✓ Correct
Free Cash Flow to the Firm (FCFF) represents the cash available to all investors (both equity and debt).
Calculation:
PBIT after tax = $40m * (1 - 0.25) = $30m.
Add: Depreciation = $8m.
Less: Capital Investment = $12m.
Less: Increase in Working Capital = $3m.
FCFF = 30 + 8 - 12 - 3 = $23m.
Common mistakes
Forgetting to deduct tax from PBIT, or adding the working capital increase instead of deducting it (an increase in WC is a cash outflow).
Practice the full ACCA FM — Financial Management Practice Exam 6
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