1. ) Meyer Henderson, CFA, is analyzing the financials of Roth Department Stores. He intends to use a free cash flow to the firm (FCFF) model to value Roths common stock. In the 2016 financial statements and footnotes he has identified the following items:

• Item #1: Roth reported depreciation and software amortization of $23 million in 2016.
• Item #2: The deferred tax liability increased by $17 million in 2016.
• Item #3: Roth reported income of $6 million in 2016 from the reversal of previous restructuring charges related to store closings in 2015.
• Item #4: Net income totaled $173 million in 2016.
• Item #5: The net increase in noncash net working capital accounts was $47 million in 2016.
• Item #6: Net capital spending totaled $86 million in 2016.
• Item #7: Roth reported interest expense of $19 million.

Henderson estimated Roths marginal tax rate to be 35%. He also expects Roth to be profitable for the foreseeable future, so he does not expect the deferred tax liability to reverse. As the base year projection for his FCFF valuation, Henderson calculates

FCFF for 2016 as: FCFF2016 = $173 + $23 + $6 + $17 + [$19(1 0.35)] $86 $47 = $98.35

One item is incorrect, identify which one. Also correct the FCFF calculation accordingly.

Both item is treated correctly.

Depreciation and Amortization is non cash expense.Since it has deducted to arrive at net income,hence it is added back to net income while calculating FCFF(Free cash flow to firm)

Further DTL(Deferred tax liability) is created by debiting the profit or loss statement.It is deducted while arriving at net income.It is also non cash transaction and hence added back to net income.