- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 28. Free Cash Flow Valuation
- Subject 3. Forecasting FCFF and FCFE
CFA Practice Question
Watson wants to forecast FCFE of Alcan, Inc for the year of 2005. The sales amount of Alcan is $100 million in 2004. After careful research and evaluation, he expects
- sales growth rate to be 30% for 2005.
- net income margin to be 25% for 2005.
- the company to finance incremental fixed and working capital investments with 60% debt - the target debt ratio.
- incremental FC (investment in FC - Depreciation) to be 40% of sales increase.
- incremental WC to be 30% of sales increase.
What is the expected FCFE?
A. $11.9 million.
B. -$1.1 million.
C. $24.1 million.
Explanation: 

FCFE = NI - (FCInv - Dep) - WCInc + Net borrowing
User Contributed Comments 1
User | Comment |
---|---|
danlan2 | FCFE =NI+NCC-(WC+FC)(1-DR) Since NI=Sales * profit margin, WC and FC are proportional to sales change, and debt ratio for them is 0.6 FCFE=130*0.25-(0.3+0.4)*30*(1-0.6) =32.5-8.4 =24.1 |