Question 22 Page 21: The 2008 estimate of FCFF is… What i don’t understand why he took sales as EBIT! I’m confused. Here’s the solution Schweser provides: When depreciation is the only noncash charge, FCFF can be estimated from: FCFF = EBIT(1 – tax rate) + Dep – FCInv –WCInv EBIT2008 = $4,052,173 × 1.06 × 0.064 = $274,899 Therefore: FCFF2008 = $274,899 (1 – 0.3) + $60,000 – $36,470 – $24,313 = $191,646
Read the question a little more carefully. You know you can calculate FCFF with EBIT. They give you the forecast that sales will grow 6% but the EBIT margin is not expected to change (currently at 6.4%) EBIT2008 = $4,052,173 × 1.06 × 0.064 = $274,899 That is just growing sales at 6% and finding EBIT as a % of sales.
OMG how did i miss that! i slipped the part where it mentions that EBIT is a margin of sales… Thanks Niblita…
Because vignettes suck.
tell me about it! it reminds me of the critical reasoning section of the GMAT exam…
I’ve started using a new strategy when reading vignettes…sure maybe glance at the question, but the most important part is to read the vignette carefully (every word) and circle or underscore important tidbits like the sales growth that Niblita75 just referenced. Another tip, when they do the statement 1, statement 2, etc…after you read the statement put a check mark if it is true or an x if it is false…the likelihood is pretty high that they are going to ask you if the statements are correct/incorrect anyway.
It may be that I have a slow brain, but it takes me some time when one person will make two statements, the next person will disagree with one and agree with the other, and the question will ask if the second person’s conclusions were correct. I hate those.
^^I know what you mean, CFAI doesn’t do as much of those mind twist solutions. I think Schweser does them to make sure you are carefully reading the question/statements. There was one on exam 2 like that and I literally laughed when I read it.
that’s what i don’t like about the online exams. if you look at my written exams, i have markings and true and false all over the place. no can do with the online tests.
I am using that excuse for my score on the CFAI sample 2.
Niblita75 Wrote: ------------------------------------------------------- > I am using that excuse for my score on the CFAI > sample 2. exactly. 
Hey, be careful with the statement 1 & 2, etc. checkmarks if they are true or not. One question I read said the analyst believes that the statement(s) is/are false, agree or disagree. Tricky bastards…