ExpertMedium2 marksMultiple Choice
ACCA · Question 21.1 · Business Valuations
Section B - Case 2: Quantum Mesh Inc
Scenario: Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m.
Question 1: What is the Free Cash Flow to the Firm (FCFF) for the year?
Section B - Case 2: Quantum Mesh Inc
Scenario: Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m.
Question 1: What is the Free Cash Flow to the Firm (FCFF) for the year?
Answer options:
A.
$2.0m
B.
$3.0m
C.
$4.0m
D.
$5.0m
How to approach this question
Use the FCFF formula: EBIT × (1 - Tax Rate) + Depreciation - Capital Expenditure - Increase in Working Capital.
Full Answer
B.$3.0m✓ Correct
Free Cash Flow to Firm (FCFF) is calculated as:
EBIT(1 - t) = $5m × (1 - 0.20) = $4.0m
Add: Depreciation = $1.0m
Less: Capital Expenditure = $1.5m
Less: Increase in Working Capital = $0.5m
FCFF = 4.0 + 1.0 - 1.5 - 0.5 = $3.0m.
Common mistakes
Adding the increase in working capital instead of subtracting it, or forgetting to tax the EBIT.
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