CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Quinton is evaluating Proust Company for the year of 2011. Quinton has gathered the following information (in millions):

  • Net income: $30.
  • Interest expense: $25.
  • Depreciation: $60.
  • Investment in working capital: -$20.
  • Investment in fixed capital: $60.
  • Tax rate: 30%.
  • Net borrowing: $50.
  • Non-cash restructuring expenses during the year: $55.
  • Amortization of long term bond discount: $40.

Assume that the tax treatment of all non-cash items is the same as that of other items in the books. There are no differed taxes incurred. Calculate the FCFF for Proust for the year.
A. $162.5 million.
B. $122.5 million.
C. $67.5 million.
Explanation: NCC = Depreciation + non-cash restructuring charges + bond discount amortization = 60 + 55 + 40 = $155 million.

FCFF = NI + NCC + Int (1 - Tax rate) - FCInv - WCInv = 30 + 155 + 25 (1 - 0.3) - (-20) - 60 = $162.5 million.

User Contributed Comments 9

User Comment
JVAC what about net borrowing?
tumanta Imp point - ques is asking for actual FCFF and not sustainable FCFF. If that was the case, then we wud have taken restructuring and amot net of tax.
volkovv question asks about FCFF, net borrowing is added only for FCFE
Rotigga Regarding bond discount amortization-- wouldn't you SUBTRACT that from NCC? When you buy a bond at a discount, you amortize the discount over time as a non-cash gain, therefore, you would SUBTRACT from NCC. If what I said is true, then:

FCFF = NI + NCC + Int (1 - Tax rate) - FCInv - WCInv
= 30 + 60 + 55 - 40 + 25*(0.7) - 60 - (-20) = 82.5
piano Rotigga: I think here the company is the issuer of the discount bond. A company will never amortize a discount bond if it is the purchaser of the bond.
shival piano: What about bonds which were purchased with premium?
kazec The doubt I'm having here: to account for bond discount amort, you have Dr interest expense, Cr cash, Cr bond payable. That is to say, interest expense = cash interest expense + bond amortization. By adding back int(1-t), you already include the amortization, don't you? If so, why do we need to add amortization back to NI?
kazec I'd understand all this, if interest expense refers to cash interest (or possibly interest payable), and does not include bond amort. Any idea?
cminor You add back for a bond discount and subtract a premium.

Discount => IS interest expense (non-cash but this is how we put it in financials because of accounting) > Coupon (cash) so you docked yourself too hard in the financials because of your lower coupon so you get to add it back when doing FCFF

Opposite is true for premium:
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