While valuing the equity of Rio National Corp. (from the previous problem), Katrina Shaar is considering the use of either free cash flow to the firm (FCFF) or free cash flow to equity (FCFE) in her valuation process.

www.mhhe.com/bkm 13 Equity Valuation 431

a. State two adjustments that Shaar should make to FCFF to obtain free cash fl ow to equity.

b. Shaar decides to calculate Rio National’s FCFE for the year 2009, starting with net income. Determine for each of the fi ve supplemental notes given in Table 13.7 whether an adjustment should be made to net income to calculate Rio National’s free cash fl ow to equity for the year 2009, and the dollar amount of any adjustment.

c. Calculate Rio National’s free cash fl ow to equity for the year 2009. LO.1