Chartered Financial Analyst (CFA) Practice Exam Level 2

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What does Adjusted FFO represent in financial analysis?

Economic Value Added
Adjusted Free Cash Flow
Adjusted Funds From Operations
Economic Income

The correct answer is: Economic Income

Adjusted FFO, or Adjusted Funds From Operations, is a financial metric commonly used in the real estate investment sector to provide a clearer picture of a company's operational performance. This measure takes the traditional Funds From Operations (FFO), which is used to assess cash generated from core operations, and adjusts it for specific items that may not represent ongoing performance, such as gains or losses from asset sales, non-recurring expenses, or certain accounting adjustments. This adjusted approach helps analysts and investors evaluate the sustainable cash flow available to equity holders more accurately. Adjusted FFO is particularly relevant in the context of real estate investment trusts (REITs), where traditional earnings measures might not fully capture the economic reality of cash flows due to significant depreciation and amortization expenses. Understanding Adjusted FFO is vital for making informed investment decisions in real estate-related fields, as it offers a better comparative basis for valuation among similar entities.