CFA Practice Question

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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 EBITDA approach to find what FCFF and FCFE should be for CSG. Assume the income tax rate is 30%.

Correct Answer: FCFF = EBITDA (1 - Tax rate) + Dep (Tax rate) - FCInv - WCInv
= 3261 (1- 0.3) + 1169 x 0.3 - 1612 - (-52 + 67 - 168 - 24) = $1,198 million

FCFE = EBITDA (1 - Tax rate) + Dep (Tax rate) - Int (1 - Tax rate) - FCInv - WCInv + Net borrowing = 3261 (1 - 0.3) + 1169 (0.3) - 942 (1 - 0.3) - 1612 - (-52 + 67 - 168 - 24) + (4062 - 2533) = $2,068 million

User Contributed Comments 3

User Comment
JimM Don't forget to add back in the Dep(Tax rate) term in this calculation.
alejandroc Shouldn't FCFF incorporate the tax shield given by interest income?
davidt876 alejandroc - we've been removing the tax shield from interest this whole time with Int * (1-T)... the idea is that for FCFF we want to see the cash flows before any financing decision have been made, so we don't get to benefit from the tax shield.

depreciation isn't a financing decision, so when we add depreciation, we add back in its tax benefit - that is, by not removing it.

so FCFF does incorporate the tax shield given by interest income.. it just removes it.
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