- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 22. Free Cash Flow Valuation
- Subject 2. Computing FCFF and FCFE from net income, EBIT, EBITDA, or CFO
CFA Practice Question
Connie's Sporting Goods (CSG) has net income of $805 million for 2011. Using information from the CSG's financial statements below, use the EBIT approach to find what FCFF and FCFE should be for CSG. Assume the income tax rate is 30%.
Correct Answer: FCFF = EBIT (1 - Tax rate) + Dep - FCInv - WCInv
= 2092 (1 - 0.3) + 1169 - 1612 - (-52 + 67 - 168 - 24) = $1,198 million
= 2092 (1 - 0.3) + 1169 - 1612 - (-52 + 67 - 168 - 24) = $1,198 million
FCFE = EBIT (1 - Tax rate) - Int (1 - Tax rate) + Dep - FCInv - WCInv + Net borrowing = 2092 (1 - 0.3) - 942 (1 - 0.3) + 1169 - 1612 - (-52 + 67 - 168 - 24) + (4062 - 2533) = $2,068 million
User Contributed Comments 5
| User | Comment |
|---|---|
| blackberry1 | CAN SOMEONE EXPLAIN NET WORKING CAPITAL PART? LIKE WHY IS -52 AND NOT POSITIVE? THNKS |
| aravinda | You can think of it this way.... Any increases in current liability (ex: AP) is increase in cashflow and any decrease in current asset is a decrease in cashflow... In the calculation of CFO, these 'signs' are already taken into consideration...so for the actual values you just the opposite sign... hope I was clear... |
| Allen88 | Thanks aravinda! |
| quanttrader | yes, since CFO = NI + NCC - WC(inv), then as aravinda has said we will use opposite signs since FCFF = CFO + int(1-t) - FC(inv) |
| davidt876 | lackberry1 - you can just use the numbers as they appear. i agree that flipping all their signs just to multiply their sum by (-1) seems a little redundant but you should understand why an increase in current assets - like inventory and receivables - represent a cash outflow.. in the same way an increase in fixed (tangible) assets represents a cash outflow and is subtracted as well |