Chartered Financial Analyst Level 1

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Explanation:

To determine the net debt repayment, we use the relationship between FCFF and FCFE, adjusting for the after-tax interest expense. The correct calculation is as follows:

FCFF is given as 2,500.
FCFE is given as 1,300.
Interest paid is 260, and the tax rate is 40%, so the after-tax interest is 260 * (1 - 0.40) = 156.

Rearranging the formula for FCFF:

$FCFF = FCFE + \text{Net debt repayment} + \text{After-tax interest}$

Substituting the known values:

$2,500 = 1,300 + \text{Net debt repayment} + 156$

Solving for Net debt repayment:

$\text{Net debt repayment} = 2,500 - 1,300 - 156 = 1,044$

Thus, the correct answer is B (1,044). Incorrect options:

A (940): Incorrectly subtracts the full interest amount without adjusting for taxes.
C (1,200): Assumes interest is classified as a financing activity, leading to an incorrect calculation.

Explanation:

To determine the net debt repayment, we use the relationship between FCFF and FCFE, adjusting for the after-tax interest expense. The correct calculation is as follows:

FCFF is given as 2,500.
FCFE is given as 1,300.
Interest paid is 260, and the tax rate is 40%, so the after-tax interest is 260 * (1 - 0.40) = 156.

Rearranging the formula for FCFF:

$FCFF = FCFE + \text{Net debt repayment} + \text{After-tax interest}$

Substituting the known values:

$2,500 = 1,300 + \text{Net debt repayment} + 156$

Solving for Net debt repayment:

$\text{Net debt repayment} = 2,500 - 1,300 - 156 = 1,044$

Thus, the correct answer is B (1,044). Incorrect options:

A (940): Incorrectly subtracts the full interest amount without adjusting for taxes.
C (1,200): Assumes interest is classified as a financing activity, leading to an incorrect calculation.

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An analyst gathers the following information (in thousands) about a company:

FCFF: 2,500

FCFE: 1,300

Interest paid: 260

If interest paid is classified as a cash flow from operating activities and the income tax rate is 40%, the net debt repayment (in thousands) is closest to:

Exam-Like

940

15.4%

1,044

61.5%

1,200

23.1%

Chartered Financial Analyst Level 1

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An analyst gathers the following information (in thousands) about a company: FCFF: 2,500 FCFE: 1,300 Interest paid: 260 If interest paid is classified as a cash flow from operating activities and the income tax rate is 40%, the net debt repayment (in thousands) is closest to:

An analyst gathers the following information (in thousands) about a company:

FCFF: 2,500

FCFE: 1,300

Interest paid: 260

If interest paid is classified as a cash flow from operating activities and the income tax rate is 40%, the net debt repayment (in thousands) is closest to: