Madura Inc. wants to increase its free cash flow by $180 million during the comi

Question

Madura Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: EBIT is projected to equal $960 million. Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. The tax rate is 40%. There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. What increase in net operating working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Explanation / Answer

Solution: $156

Working:

EBIT

960

Gross capital expenditure

360

Depreciation

120

Tax rate

40%

Target increase in FCF

180

?

FCF = EBIT (1-T) + Depreciation - Capex - Change in NOWC

180 = 576 + 120 - 360 - Change in NOWC

Change in NOWC = 576 + 120 - 360 - 180 = 156

EBIT

960

Gross capital expenditure

360

Depreciation

120

Tax rate

40%

Target increase in FCF

180

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