Question

When calculating FCFF starting from net income, the amortization of a long‐term bond premium in an income statement would be:

a) Added back to net income.
b) Subtracted from net income.
c) Not relevant when adjusting net income to calculate FCFF.
d) Included as an extra item in FCFF.

Answer 1

The amortization of a long-term bond premium in an income statement is subtracted from net income when calculating FCFF.

Step-by-step explanation:

The correct answer is b) Subtracted from net income.

When calculating Free Cash Flow to Firm (FCFF) starting from net income, the amortization of a long-term bond premium is subtracted from net income. This is because the amortization of a long-term bond premium represents an expense that reduces net income and needs to be adjusted when calculating FCFF.

For example, if a company has a net income of $100,000 and an amortization of long-term bond premium of $10,000, the FCFF would be calculated as $100,000 - $10,000 = $90,000.