Derive the operating free cash flow and free cash flow to equity . Additionally,

Question

Derive the operating free cash flow and free cash flow to equity . Additionally, compute the price of the stock according to both definitions. Assume the growth rate for both is the same and that it is constant and perpetual. We know that cost of debt is 5% after taxes and the weight of debt is 40%. The cost of equity is 15%.

income statement 1998 1999e Revenue $4,750 $5,140 Cst of Goods Sold $2,400 $2,540 Selling, General, and administrative 1,400 1,550 Depreciation 180 210 Goodwill amortization 10 10 Operating Income $760 $830 Interest Expense 20 25 Income before Taxes $740 $805 Income Taxes 265 295 Net Income $475 $510 Earnings per share $1.79 $1.96 Average shares outstanding (millions) 265 260 Balance Sheet Cash $400 $400 Accounts receivable $680 $700 Inventories $570 $600 Net property, plant, and equipment $800 $870 Intangibles $500 $530 Total assets $2,950 $3,100 Current liabilities $550 $600 Long-term debt $300 $300 Total liabilities $850 $900 Stockholders' equity $2,100 $2,200 Total liabilities and equity $2,950 $3,100 Boook value per share $7.92 $8.46 Annual dividend per share $0.55 $0.60

Explanation / Answer

Answer:

Operating Free cash flows = Operating income (1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure

Tax rate = Income Taxes / Income before Taxes =295 / 805 = 0.3665

Change in Net working capital = 1998 Net working capital

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