Free cash flows (FCF) used in DCF valuations discussed in the chapter are defined as follows:

FCF to debt and equity = Earnings before interest and taxes × (1 – tax rate)

+ Depreciation and deferred taxes – Capital expenditures –/+ Increase/decrease in working capital.

FCF to equity = Net income + Depreciation and deferred taxes – Capital expenditures –/+ Increase/decrease in working capital +/– Increase/decrease in debt Which of the following items affect free cash flows to debt and equity holders?
Which affect free cash flows to equity alone? Explain why and how.
• An increase in accounts receivable • A decrease in gross margins • An increase in property, plant and equipment • An increase in inventory • Interest expense • An increase in prepaid expenses • An increase in notes payable to the bank.

AppendixLO1