QFC Cash Flow Management 3 β Questions and Answers
Question 1: What is the primary difference between FCFF and FCFE?
- FCFF is available to all capital providers while FCFE is available only to equity holders (Correct answer)
- FCFE includes interest payments while FCFF excludes them
- FCFF uses equity discount rate while FCFE uses WACC
- FCFE is pre-tax while FCFF is post-tax
Correct answer: FCFF is available to all capital providers while FCFE is available only to equity holders
FCFF represents cash available to both debt and equity holders; FCFE subtracts net borrowing and interest to isolate equity holders' share.
Question 2: A company's days sales outstanding (DSO) increases from 30 to 45 days. What is the likely cash flow impact?
- Operating cash flow decreases as accounts receivable increases (Correct answer)
- Operating cash flow increases due to higher sales
- Investing cash flow decreases
- There is no cash flow impact
Correct answer: Operating cash flow decreases as accounts receivable increases
Rising DSO means customers take longer to pay, increasing accounts receivable and reducing operating cash flow.
Question 3: Which scenario would result in positive operating cash flow despite a reported net loss?
- Large non-cash depreciation charges exceed the net loss (Correct answer)
- Significant capital expenditures during the period
- Increase in inventory purchased on credit
- Repayment of long-term debt
Correct answer: Large non-cash depreciation charges exceed the net loss
High depreciation is added back to net income in the indirect method; if it exceeds the net loss, operating cash flow turns positive.
Question 4: What is the relationship between EBITDA and unlevered free cash flow?
- UFCF = EBITDA - Taxes - CapEx - Change in Working Capital (Correct answer)
- UFCF = EBITDA - Interest - CapEx
- UFCF = EBITDA + Depreciation - CapEx
- UFCF = EBITDA Γ (1 - WACC)
Correct answer: UFCF = EBITDA - Taxes - CapEx - Change in Working Capital
Unlevered FCF starts with EBITDA, subtracts cash taxes (ignoring interest tax shield), CapEx, and working capital changes.
Question 5: A firm uses a 13-week rolling cash flow forecast. Which risk does this primarily help manage?
- Short-term liquidity risk (Correct answer)
- Long-term solvency risk
- Foreign exchange translation risk
- Credit default risk
Correct answer: Short-term liquidity risk
A 13-week (quarterly) rolling forecast helps treasurers identify near-term cash shortfalls and manage day-to-day liquidity.
Question 6: How does an increase in the tax rate affect FCFF, holding all else constant?
- FCFF decreases because after-tax operating income falls (Correct answer)
- FCFF increases because the tax shield on depreciation rises
- FCFF is unaffected since taxes are a non-cash item
- FCFF increases because net borrowing rises
Correct answer: FCFF decreases because after-tax operating income falls
Higher taxes reduce NOPAT (Net Operating Profit After Tax), which is the starting point for FCFF, directly lowering free cash flow.
Question 7: Which of the following best characterizes a sustainable payout ratio in the context of cash flow management?
- Dividends paid do not exceed free cash flow to equity over time (Correct answer)
- Dividends are maintained at a fixed percentage of net income regardless of cash flow
- Payout ratio equals 100% of earnings each quarter
- Dividends are funded by new debt issuance each year
Correct answer: Dividends paid do not exceed free cash flow to equity over time
A sustainable payout ensures dividends are covered by FCFE; consistently paying dividends above FCFE depletes cash or requires excessive leverage.
QFC Cash Flow Management 3
What is the primary difference between FCFF and FCFE?