Which of the following shows the relationship between FCFF (free cash flow to the firm) and cash flow from operating activities (CFO)? Note that FClnv denotes fixed capital investment and WClnv denotes working capital investment. 0 a. FCFF = CFO + Net noncash charge + After-tax interest expense - FClnv 0 b. FCFF = CFO + After-tax interest expense - FClnv - WClnv 0 c. FCFF = CFO + After-tax interest expense - FClnv 0 d. FCFF = CFO + After-tax interest expense - WClnv 0 e. None of the above
Question
Which of the following shows the relationship between FCFF (free cash flow to the firm) and cash flow from operating activities (CFO)? Note that FClnv denotes fixed capital investment and WClnv denotes working capital investment. 0 a. FCFF = CFO + Net noncash charge + After-tax interest expense - FClnv 0 b. FCFF = CFO + After-tax interest expense - FClnv - WClnv 0 c. FCFF = CFO + After-tax interest expense - FClnv 0 d. FCFF = CFO + After-tax interest expense - WClnv 0 e. None of the above
Solution
Free Cash Flow to the Firm (FCFF) is a measure of a company's ability to generate cash flow that is available to all the firm's claim holders, including equity holders, debt holders, preferred stock holders, and convertible security holders.
The formula for FCFF is:
FCFF = Cash Flow from Operating Activities (CFO) + After-tax Interest Expense - Fixed Capital Investment (FCInv)
This formula shows that FCFF is the cash flow from operating activities, plus any after-tax interest expense (which is added back because FCFF is pre-debt cash flow), minus any investments in fixed capital.
So, the correct answer is:
c. FCFF = CFO + After-tax interest expense - FClnv
However, it's important to note that different sources may use slightly different formulas for FCFF, depending on what items they include in cash flow from operating activities and fixed capital investment.
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