CFA Practice Question

There are 233 practice questions for this study session.

CFA Practice Question

Which of the following statements is false?
A. Depreciation is not a cash flow since it is not a cash expense for the firm.
B. Depreciation is usually the largest but not the only non-cash expense.
C. Interest payments should be included in the estimated cash flows because the effects of debt financing are reflected in the cost of capital.
Explanation: The cost of capital reflects the effects of debt financing. Including interest payments in the estimated cash flows would double-count the cost of debt.

User Contributed Comments 10

User Comment
Shelton Int <> Debt
todolist Depreciation is the largest non-cash expense.
soarer1 can someone explain pls?
kenjisan You should leave out interest expense in calculating net cash flows because it will then be discounted using the WACC which includes cost of interest. If you don't, then you will double count interest expense.
Joel1980 Is depreciation the largest non-cash expense always?
azramirza But interest income is a part of operating cash flow and debt a part of financing cash flow?
c12mintz Writedowns and amortizations (see HPQ and MSFT) can be larger than depreciation.
rleewilson Could a company not have a write-down of say, intangible assets, a non-cash item, that dwarfs depreciation?
jnptrsn1 Conversely, it could be a holding company and have no depreciation.
lighty0770 Believe B is very subjective as service based businesses would not have nearly the depreciation expense that a manufacturing company would. Depreciation is NOT always the largest expense.
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