CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Watson wants to forecast FCFE of Alcan, Inc for the year of 2011. After careful research and evaluation, he expects (per share value):

  • EPS to grow 10% from $4 in 2010.
  • Capital expenditure to grow 12% from $6 in 2010.
  • Depreciation to grow to 50% from $3 in 2010.
  • Working capital to grow 25% from $1 in 2010.
  • Target debt ratio: 40%.

What is the expected FCFE for 2011?
Correct Answer: FCFE = NI - (1 - DR) (FCInv - Dep) - (1 - DR) WCInc = 4.4 + (1 - 0.4) x (3 x 1.5 - 6 x 1.12 - 1 x 1.25) = $2.318.

User Contributed Comments 7

User Comment
danlan2 NI+(1-DR)(DEP-FCInv-WCInv)
MonkeySee It is assumed that part of the change in working capital is funded by debt thus to maintain the capital structure.
rhardin We should subtract out working capital INVESTMENT and fixed capital INVESTMENT, not just the totals of what FC and WC will be in 2011.
business why depreciation is 0.6*1.5*3 added instead of just 1.5*3. Surely the debt holders are not funding part of depreciation.
quanttrader I for forecasted FCFE use only growth in FC & WC inv
davidt876 i'm a lil confused too business
ashish100 It's simple. Just thank danlan keep on keepin on.
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