Question 1

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?

Accepted Answer

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).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to deduct tax from PBIT, or adding the working capital increase instead of deducting it (an increase in WC is a cash outflow).

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FM — Financial Management Practice Exam 6

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