CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Assume a 30% tax rate and a $100 increase in notes payable, this period's FCFF will ______ and FCFE will ______.
A. not change; not change.
B. not change; increase by $100.
C. increase by $100; increase by $100.
Explanation: FCFF is not affected by changes in notes payable (net borrowing). However, as FCFE = FCFF + Net borrowing - Int ( 1- Tax rate), FCFE will increase by $100.

User Contributed Comments 7

User Comment
danlan2 Notes payable does not affect interest expense?
RNAN Isn't Notes Payable part of Working Capital?
RNAN Yes, I checked the notes (LOS 12:B:b) and it clearly states that Notes Payable is part of WCInv for the purpose of calculating FCF.
Does anyone else agree with me that the answer given is incorrect? Answer C seems to be correct.
volkovv I disagree, cash and current portion of debt should be excluded from working capital for the purpose of calculating FCF for valuation purposes. In case of FCFE change in short term debt (notes payable) and change in long term debt is added as 'Net Borrowing' since this is additional money available to shareholders.
mchu WCInv=(Inv+A/R)-(A/P)
dblueroom RNAN - Note payable is not part of working capital. you were probably thinking about accounts payable.
akirchner1 From the CFA book: Although working capital (WC) is often defined as current assets minus current liabilities, WC for cash flow and valuation purposes is defined to exclude cash and short term debt (which includes notes payable and the current portion of long-term debt.
You need to log in first to add your comment.