ExpertHard1 markMultiple Choice
CPA · Question 03 · Area I: Business Analysis
TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Interest Expense: $800,000<br/>- Income Tax Expense: $1,200,000<br/>- Depreciation Expense: $1,500,000<br/>- Amortization Expense: $500,000<br/>- Stock-based Compensation: $300,000<br/>- Capital Expenditures: $2,000,000<br/>- Increase in Working Capital: $400,000<br/><br/>Calculate the company's Free Cash Flow (FCF) to the Firm, assuming the tax rate is 25%.
TechSolutions Inc. reports the following financial data:<br/>- Net Income: $5,000,000<br/>- Interest Expense: $800,000<br/>- Income Tax Expense: $1,200,000<br/>- Depreciation Expense: $1,500,000<br/>- Amortization Expense: $500,000<br/>- Stock-based Compensation: $300,000<br/>- Capital Expenditures: $2,000,000<br/>- Increase in Working Capital: $400,000<br/><br/>Calculate the company's Free Cash Flow (FCF) to the Firm, assuming the tax rate is 25%.
Answer options:
A.
$5,700,000
B.
$4,900,000
C.
$7,000,000
D.
$9,300,000
How to approach this question
Identify the specific FCF definition implied by the options. Common CPA definition for valuation (FCFF) often starts with EBITDA or NOPAT. Here: EBITDA - Cash Taxes - Capex - Change in Working Capital.
Full Answer
A.$5,700,000✓ Correct
.
Common mistakes
Forgetting to add back non-cash stock compensation to EBITDA; ignoring working capital changes.
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