The Schweser EOC questions on price multiples (Q20, p.269) has a calculation for adjusted CFO to calculate P/CFO. The answer shows that after adjusting for non-recurring items (fine), they add after-tax interest expense to the CFO to calculate the adjusted value. Why is that? When we do the FCFF calculations in the previous chapter, it describes: FCFF= NI + NCC - WCInv + Int(1-t) - FCInv And says that if we start with CFO, remember that that’s NI + NCC - WCInv. In this definition, CFO excludes after tax interest, but in the EOC question, it appears to add it in. I’m confused!
P/CF => one of the various formats of CF that may be used is CFO + Int (1-T) idea being -> arrive at a measure of CFO to account for differences in amount of leverage the company might have, so the P/CF measure is more comparable.
I remember that in P/CF there are various definitions of cash flow, but is the CFO + Int(1-t) the most common one? ie. do we use it as a default? Thanks!
if you see “adjusted CFO” you should use CFO + Int(1-t) just read the Q carefully since there are 4 different defination for CF here
I’ve seen the adjusted CFO calculated as CFO + Cash interest + Cash taxes, has anyone else seen this in the curriculum?