20.4: Free Cash Flow and Ratios

Question 1

Free cash flow to the firm (FCFF) computed starting with net income as:

Answer 1

FCFF = NI + NCC + Int (1 - Tax rate) – FCInv – WCInv

Question 2

FCFF can also be computed from cash flow from operating activities as:

Answer 2

FCFF = CFO + Int (1 - Tax rate) – FCInv

Question 3

FCFE is the cash flow available to the company’s common stockholders after …

Answer 3

All operating expenses and borrowing costs (principal and interest) have been paid and necessary investments in working capital and fixed capital have been made.

Question 4

Free cash flow to equity (FCFE) FCFE = …

Answer 4

CFO – FCInv + Net borrowing

Question 5

When net borrowing is negative, debt repayments exceed receipts of borrowed funds. In this case, FCFE can be expressed as:

Answer 5

FCFE = CFO – FCInv – Net debt repayment