CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

An analyst gathers the following annual information ($ millions) about a company that pays no dividends and has no debt:

Net income: 45.8
Depreciation: 18.2
Loss on sale of equipment: 1.6
Decrease in accounts receivable: 4.2
Increase in inventories: 3.4
Increase in accounts payable: 2.5
Capital expenditures: 7.3
Proceeds from sale of stock: 8.5

The company's annual free cash flow to equity ($ millions) is closest to ______.
A. 55.1
B. 59.2
C. 61.6
Explanation: Free cash flow to equity in a company without any debt is equal to cash flow from operations (CFO) less capital expenditures. CFO = net income + depreciation + loss on sale of equipment + decrease in accounts receivable - increase in inventories + increase in accounts payable. The loss on sale of equipment is added back when calculating CFO. It would have been deducted in the calculation of net income but the loss is not the cash impact of the transaction (the proceeds received, if any, would be the cash effect) and cash flows related to equipment transactions are investing activities, not operating activities. CFO = 45.8 + 18.2 +1.6 + 4.2 - 3.4 +2.5 = $68.9 million $68.9 - $7.3 = $61.6 million free cash flow to equity

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