Question

1. In the calculation of operating cash​ flow, which of the following is the correct formula for calculating​ taxes?

A.​(EBIT –​ Interest) x T B.EBIT x T C.EBITDA x T D.(EBITDA –​ Interest) x T

2. True or False. When net working capital​ declines, free cash flow goes up.

3. True or False. When calculating the investment in net working capital​ (for free cash​ flow) you should use the regular accounting definition of net working capital.

4. Which of the following is an example of a redundant​ asset?

A.The land occupied by the​ company’s factory

B.The​ company’s accounts receivables

C.Long-term investments in stocks and other securities

D.The​ company’s fleet of delivery trucks

Answer 1

2. True; When net working capital declines, free cash flow goes up, as decline in working capital is treated as an inflow of cash.

3. False: When calculating the investment in net working capital (for free cash flow), one should not use the regular accounting definition of net working capital. All the funds that are operating in nature and are being used in the business to generate cash flows should be considered as working capital.

4. A. The land occupied y the company's factory

This is an example of a sunk cost, and hence redundant for decision making purposes.