Area 2: Financial Statement Analysis — CPA Practice Question 14

How to approach this question

FCFF is cash flow available to ALL providers of capital (Debt + Equity). Start with Net Income, add back non-cash (Depr), add back interest (since it was subtracted to get NI, but belongs to debt holders), subtract investments (Capex, WC).

Full Answer

C.Add Depreciation, add Interest Expense (1 - Tax Rate), subtract Capital Expenditures, subtract Increase in Working Capital.✓ Correct

C

FCFF starts with Net Income. We add back Interest Expense * (1-Tax Rate) because interest is a return to debt holders (part of the 'Firm'). We add Depreciation (non-cash). We subtract investments in fixed assets (Capex) and Working Capital.

Common mistakes

Confusing FCFF with FCFE (which includes net borrowing); forgetting to tax-effect the interest add-back.

An analyst is calculating Free Cash Flow to the Firm (FCFF). Which of the following adjustments to Net Income is CORRECT?

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Full Answer

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