Answer: 475.

## Explanation Free Cash Flow to the Firm (FCFF) can be calculated using the following formula: **FCFF = CFO - Capital Expenditures + Interest × (1 - Tax Rate)** Where: - CFO = Cash Flow from Operations = $500 million - Capital Expenditures = $40 million - Interest = $20 million - Tax Rate = 25% = 0.25 **Calculation:** 1. **Interest after tax adjustment:** Interest × (1 - Tax Rate) = 20 × (1 - 0.25) = 20 × 0.75 = $15 million 2. **FCFF = CFO - Capital Expenditures + Interest after tax** FCFF = 500 - 40 + 15 = $475 million **Alternative formula:** FCFF = CFO - Capital Expenditures + Interest × (1 - Tax Rate) **Why this formula?** - Free Cash Flow to the Firm represents cash available to all investors (both equity and debt holders) - Interest expense is tax-deductible, so we need to add back interest after tax - Capital expenditures are subtracted because they represent investments in long-term assets - Net borrowing is not included in FCFF calculation as it's a financing activity **Verification:** - Option A (460) would be CFO - Capital Expenditures = 500 - 40 = 460 (incorrect - ignores interest) - Option B (470) would be CFO - Capital Expenditures + Interest = 500 - 40 + 20 = 480 (incorrect - doesn't adjust for tax) - Option C (475) is correct: 500 - 40 + 15 = 475

Author: LeetQuiz .