An analyst is computing Free Cash Flow to Firm (FCFF) for a manufacturing enterprise. The financial statements disclose: Operating Profit (EBIT): Rs. 200 crore; Effective Corporate Tax Rate: 25%; Depreciation & Amortization: Rs. 50 crore; Capital Expenditures: Rs. 80 crore; Increase in Non-Cash Working Capital: Rs. 30 crore. What is the FCFF for the enterprise?

[ A ]Rs. 140 crore

[ B ]Rs. 90 crore[ CORRECT ]

[ C ]Rs. 170 crore

[ D ]Rs. 110 crore

Takeaway

Option B is correct: Rs. 90 crore

Derivation

Free Cash Flow to Firm (FCFF) represents cash generated from core operations available to ALL capital providers (equity and debt) before financing charges: Formula: FCFF = EBIT * (1 - Tax Rate) + Depreciation & Non-Cash Charges - Capital Expenditures - Increase in Non-Cash Working Capital. Calculations: NOPAT = 200 * (1 - 0.25) = Rs. 150 crore. FCFF = 150 + 50 - 80 - 30 = 200 - 110 = Rs. 90 crore. FCFF is discounted by the Weighted Average Cost of Capital (WACC) to determine total Enterprise / Firm Value. This tests indirect FCFF derivations. The primary trap is forgetting to tax-adjust EBIT or adding working capital.

Why the others fail

A — Rs. 140 crore

Rs. 140 crore incorrectly uses gross un-taxed EBIT of Rs. 200 crore (200 + 50 - 80 - 30) without deducting taxes of Rs. 50 crore.

C — Rs. 170 crore

Rs. 170 crore erroneously adds the increase in working capital (+30) and capex (+80) instead of deducting cash reinvested in the business.

D — Rs. 110 crore

Rs. 110 crore is an arithmetic error resulting from mistakenly omitting the working capital investment of Rs. 30 crore.