- CFA Exams
- CFA Level I Exam
- Topic 3. Corporate Issuers
- Learning Module 5. Capital Investments and Capital Allocation
- Subject 3. Capital Allocation Principles and Pitfalls
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. |