Which of the following formulas correctly estimates free cash flows to the firm?
A)FCFF = EBIT × (1 + tax rate)+ non cash expenses - capital expenditures - net increases in working capital
B)FCFF = EBIT × (1 - tax rate)+ non cash expenses - capital expenditures - net increases in working capital
C)FCFF = EBIT × (1 - tax rate)+ non cash expenses + capital expenditures - net increases in working capital
D)FCFF = EBIT × (1 - tax rate)- non cash expenses + capital expenditures - net increases in working capital

Question

Quizplus · Accepted Answer

The correct formula to estimate free cash flows to the firm (FCFF) is FCFF = EBIT × (1 - tax rate)+ non cash expenses - capital expenditures - net increases in working capital. This formula takes into account the taxes paid by the firm (by subtracting the product of EBIT and the tax rate from EBIT) and the investments made in long-term assets (by subtracting capital expenditures) and working capital (by subtracting net increases in working capital) from the cash flows generated by the firm's operations (EBIT + non-cash expenses). Therefore, option B is the best choice.

Which of the Following Formulas Correctly Estimates Free Cash Flows