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Free cash Flow

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Free cash Flow

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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  • March 24, 2016 at 7:44 pm #308142
    hisham503
    Member
    • Topics: 35
    • Replies: 55
    • ☆☆

    I need to know about Free Cash Flow which are then use for the valuation of acquisition (type I Cash flow and type II).
    I know the FCF are calculated like this
    EBIT(earning before interest tax)
    Less Tax
    Plus depreciation
    Less Capital Expenditure
    Less increase in working capital
    Plus decrease in W.C.

    1-Please mention more adjustment that are typical given in question(if any)
    2-Explain the principal calculating FCF, like in Cash flow statement we only take cash items,and non cash are adjusted similarly what is the principal.
    Hope my question is clear.

    March 25, 2016 at 8:34 am #308175
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51555
    • ☆☆☆☆☆

    The concept of free cash flow is exactly the same (for the same reasons) as the net cash flow that is used in normal NPV investment appraisal questions.
    We are calculating the net cash available each year for investors and discounting at the cost of capital.
    What workings are needed depends on the information that is given in the question. If you are given EBIT then you do as you have written. In other questions you might be given information about the individual revenue and expense items and you handle it like a normal NPV question.

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