A firm reports: EBIT = $800M; Tax rate = 25%; D&A = $150M; CapEx = $250M; Increase in net working capital = $40M. Compute Free Cash Flow to the Firm (FCFF). (Answer in $M.)

Question

BlackTom AI · Accepted Answer

FCFF equals NOPAT plus non-cash charges (like D&A) minus investments in operating capital (CapEx and ΔNWC).

1. Relevant knowledge points and concepts
- NOPAT (Net Operating Profit After Tax) = EBIT × (1 − tax rate). Use EBIT because FCFF measures cash available to all capital providers before financing costs.
- Depreciation & Amortization (D&A) is a non-cash expense and must be added back to NOPAT.
- Capital Expenditures (CapEx) and increases in Net Working Capital (ΔNWC) are cash outflows for operations and must be subtracted.
- Formula: FCFF = EBIT × (1 − Tax rate) + D&A − CapEx − ΔNWC.

2. Step-by-step reasoning and calculations
- Compute NOPAT:
  EBIT = $800M
  Tax rate = 25% → (1 − 0.25) = 0.75
  NOPAT = 800 × 0.75 = 600 (million dollars)
- Add back non-cash D&A:
  D&A = 150 → 600 + 150 = 750
- Subtract CapEx:
  CapEx = 250 → 750 − 250 = 500
- Subtract increase in net working capital:
  ΔNWC = 40 → 500 − 40 = 460

3. Intermediate steps (explicit)
- EBIT(1 − t) = 800 × 0.75 = 600
- + D&A = 600 + 150 = 750
- − CapEx = 750 − 250 = 500
- − ΔNWC = 500 − 40 = 460

4. Why the correct answer is correct
Using EBIT (pre-interest operating profit) and applying the tax rate yields the after-tax operating cash flow (NOPAT). Because depreciation is non-cash it must be added back. CapEx and increases in working capital consume cash and therefore reduce FCFF. Applying these standard adjustments produces $460M.

5. Why other approaches would be incorrect
- Omitting D&A (e.g., using only NOPAT − CapEx − ΔNWC) understates FCFF: 600 − 250 − 40 = 310 (wrong).
- Using EBIT instead of EBIT(1 − t) would double-count taxes: 800 + 150 − 250 − 40 = 660 (wrong).
- Treating D&A as a cash outflow and subtracting it is incorrect because it is non-cash.

6. Conclusion
The Free Cash Flow to the Firm is $460M, which matches the provided answer (460).

A firm reports: EBIT = $800M; Tax rate = 25%; D&A = $150M; CapEx = $250M; Increase in net working capital = $40M. Compute Free Cash Flow to the Firm (FCFF). (Answer in $M.)数值题

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