free cash flow for firm

[leonjames]

There are 2 equation to calculate FCFF
1 FCFF = Net Income + Non-cash item + Interest(1-TAX) - Fixed Capital Inv. - Working Capital Expense
2 FCFF = CFO + Interest(1-TAX) - Fixed Capital Inv.
Make the right side of above equal we can get:
CFO = Net Income + Non-cash item - Working Capital Expense
How to explain above equation?
Thanks,

 

[fzian]

Can you clarify your question? If you mean how the equation reduces: -
FCFF = CFO + Interest(1-TAX) - Fixed Capital Inv
CFO = FCFF - Interest(1-TAX) + Fixed Capital Inv.
CFO = Net Income + Non-cash item + Interest(1-TAX) - Fixed Capital Inv. - Working Capital Expense - Interest(1-TAX) + Fixed Capital Inv.
If you mean, why does “CFO = Net Income + Non-cash item - Working Capital Expense” hold, based on my vague memories of FRA, isn’t that how the indirect method works for calculating CFO?

 

[S2000magician]

That’s just the indirect method for CFO (with the exception that this formula assumes that there aren’t any nonoperating gains/losses included in net income).
I wrote an article on this that may be helpful: http://financialexamhelp123.com/cfo-indirect-method/.

 

[leonjames]

got it.. Thanks for S2000magician and fzian. BTW, u r artical is awesome, S2000

 

[S2000magician]

leonjames wrote:got it.. Thanks for S2000magician … .

My pleasure.

leonjames wrote:BTW, u r artical is awesome, S2000

You’re too kind.