FCFF from CF from Operations

CFA Level II
#1

The Schweser book says that to get FCFF from CF from Operations, it is CFO - FCInv + After-tax Interest Expense.

But in one of the Schweser practice tests (either 1 or 2), one of the questions ask you to calculate FCFF from CFO and the answer is given as just CFO - FCInv. I’m really confused why interest expense is not added back in.

can anyone help on this? thank you.

#2

You should check that the calculation is not actually referring to FCFE

FCFE = CF0 - FCinv

FCFF = CFO + Int(1-tax) - FCinv.

#3

FCFE = CFO - FCI + NB

#4

^^ Yeah, i missed that, thanks.

#5

my pleasure;)

#6

I don’t have Schweser, but I’m pretty certain that they are stating it correctly that FCFF= CFO+int(1-t) -FCInv.

It’s important to remember which guidelines the firm does its accounting since GAAP and IFRS treat interest expense differently.

If interest is included in CFO user IFRS or GAAP, interest needs to be added back to calculate FCFF.

However, if its included under financing, interest does not need to be added back into calculating FCFF, since it has not been accounted for in CFO.