Growth in FCFF components

CFA Level II
#1

if the questions says that all the components used to calculate FCFF have increased in the same rate, is FCFF1 simply = FCFF0*(1+g)?

#2

FCFF0=FCFF1 right? FCFF=NI+NCC+[interest(1-TR)]-FCInv-WCInv Wouldn’t the increase in FCInv and WCInv just wipe out the increases in NI, etc? Not sure. Good question.

#3

FCFF would also increase by the same % rate. Take for example: Year 0— NI=200, DEP=20, Int(1-t)= 30, WCINV=30, FCINV=40 FCFF= 180 THEN Everything increases 10% Year 1— NI=220, DEP=22, Int(1-t)= 33, WCINV=33, FCINV=44 FCFF= 198 198/180=1.10 === 10% in FCFF Sorry I suck at formatting So the answer to your original question is YES

#4

nice illustration ^ I’ve gotten questions like this on qbank so I’m inclined to believe that if they told you everything grow at the same rate then your simple formula would be an ok forecast of FCFF1: A common approach to forecasting free cash flows is to: A) project net income and expected capital expenditures. B) project earnings before interest and taxes (EBIT) and expected capital expenditures. C) project operating income and deduct depreciation. D) calculate historical free cash flow and apply an expected growth rate. Your answer: D was correct! Historical free cash flows are often used for forecasting.

#5

Thanks for the help guys. Good examples.

#6

thanks!!!

#7

Isn’t A just the formula: ni - (1-DR)(FCinv-Dep) - (1-DR)(WCinv) which is used for forecasting?

#8

Good point Nib.