I am taking the topic test on the CFAI website right now, this is the second question. It asks for FCF but specifically says not to include the change in Fixed Capital Investment in the calculation, which is the exact opposite of the Equity section. Does anyone know why this is?
Post the question… I think you may be mis-understanding or the context needs to be shown to understand better.
Q. Based on Exhibit 1, the estimated free cash flow ($ thousands) for BCC in 2014 is closest to:
- −904.0.
- 738.4.
- 378.9.
Solution
C is correct.
Free cash flowFree cash flow = Net operating profit less adjusted taxes (NOPLAT)+Depreciation−Change in net working capital−Capital expendituresNet operating profit less adjusted taxes (NOPLAT)+Depreciation−Change in net working capital−Capital expenditures NOPLATNOPLAT = Net income+After-tax interest+Change in deferred taxesNet income+After-tax interest+Change in deferred taxes NOPLAT 369.3 + 1,123.2 × (1 − 0.32) + 0 1,133.1 Plus depreciation (non-cash charges) 1,282.9 Less change in net working capital [3,698.9 − 943.7] − [1,538.7 − 820.6] −2,037.1 Less capital expenditures 17,960.6 − 19,243.5 + 1,282.9 0.0 Free cash flow 378.9
A is incorrect because it is uses the change in net fixed assets in the calculation.
Change in net fixed assetsChange in net fixed assets = 17,960.6−19,243.5=1,282.917,960.6−19,243.5=1,282.9 1,133.1+1,282.9−2,037.1−1,282.91,133.1+1,282.9−2,037.1−1,282.9 = −904.0
B is incorrect because interest is not tax adjusted in NOPLAT: 369.3 + 1,123.2 + 1,282.9 − 2,037.1 − 0 = 738.3.
The question gave you net fixed assets, not gross fixed assets. YOu have to add deprecation back to the capex, otherwise you would be double counting depreciation. Both equity and corp finance formulas are consistent.
Less capital expenditures 17,960.6 − 19,243.5 + 1,282.9 (depreciation)
Ahhh thank you for clarifying! Those topic tests love to find the most minute ways to get you to miss important details