Question

A firm can increase its Free Cash Flows to the Firm (FCFF) by doing which of the following?

Select one:

a. Decreasing its Net Working Capital.

b. Maintaining a steady level of Earnings Before Interest and Taxes (EBIT).

c. Decreasing the level of Earnings Before Interest and Taxes (EBIT).

d. Increasing its Capital Expenditures.

e. Decreasing its debt levels

Answer 1

The correct answer is A - Decreasing its Net Working Capital

The Free Cash Flows to the Firm (FCFF) is the cash flow available for debt holders and share holders after paying depreciation, taxes and investments.

The FCFF is calculated after adding non cash expenses and deducting investment expenditures and net working capital from Net income. Net working capital reduces the free cash flow available for the firm. Hence decreasing the net working capital will increase FCFF.

---> Option B and E are incorrect as Maintaining a steady level of Earnings Before Interest and Taxes and decreasing debt value will not have any impact on FCFF.

---> Option C is incorrect as decreasing EBIT will reduce FCFF.

---> Option D is incorrect as  Increasing its Capital Expenditures will decrease FCFF.

Hope it helps!