well the answers we got are right …C/B (Confused by CFA, I did mention later in the thread the tax is assumed to be 40%) I agree with Sims, … I will write the formular down to see how the changes play up. See cfai tex page 396 question 1 for the questions and their cousins. Just thought they were worth sharing…
I think I should switch my strategy from late nights and tons of coffee to a couple more hours of sleep. Black and florinpop, you’re right I was completely looking at the question with the wrong goggles on.
i haven’t had a good look at the alternative answers. but if you’re starting with NI, then higher interest will decrease the NI, then you can add it back to get to FCFF and then subtract it again to get to FCFE… i have looked at the exact calc but higher interest will decrease NI. depreciation is basically irrelevent except for its tax effects.
What would happen if accounts receivable went up by 100? Would net income still remain the same? I guess so because it is income just not in cash. So it would be a non cash charge of -100 that would have to be added back and FCFE and FCFF would both decrease by 100. Is this logic correct? Thank you.
if accounts recievable went up by 100, it would cause a drop in FCFF and FCFE by -100 each because WCinv is backed out.
AFJunkie Wrote: ------------------------------------------------------- > A > A - Interest is not added back to FCFE > calculations… I cant remember, is tax added back? or is it EBT + Depr + After tax interest for FCFF
chrismaths Wrote: ------------------------------------------------------- > Actually, I take that back. CFO will have > decreased by 60 (-100 int exp, +40 tax), And we > add back the net interest expense, not the gross. > So that makes the second one B. > > (oooh, future perfect - the underused tense). Don’t you mean “CFO would have decreased by 60…” – thus pluperfect subjunctive.
Too late. I think you guys got it right. good one.