QUESTION 3 HAS THREE PARTS (A， B， C) FOR A TOTAL OF 20 MINUTES.
While valuing the equity of Rio National Corp.， Katrina Shaar is considering the use of either cash flow from operations (CFO) or free cash flow to equity (FCFE) in her valuation process.
A. State two adjustments that Shaar should make to cash flow from operations to obtain free cash flow to equity. Explain why it is necessary to make each of the two adjustments when valuing the equity of a firm.
Note： No calculations are required.
(4 minutes)
Shaar decides to calculate Rio National‘s FCFE for the year 2002， starting with net income.
B. Determine， for each of the five supplemental notes given in Exhibit 5-3：
i. Whether a net positive adjustment， a net negative adjustment， or no adjustment should be made to net income to calculate Rio National’s free cash flow to equity for the year 2002
ii. The dollar amount of the adjustment， if any
Note： The five supplemental notes given in Exhibit 5-3 are reproduced in the Template for Question 6-B.
(10 minutes)
C. Calculate Rio National‘s free cash flow to equity for the year 2002. Show your calculations.
Note： Your calculations should start with net income.
(6 minutes)
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