Question 1. FCF Calculation Part 1 Assume that EBIT = $1200m, Depreciation = $25
ID: 2654582 • Letter: Q
Question
Question 1. FCF Calculation
Part 1 Assume that EBIT = $1200m, Depreciation = $250m, Capital Expenditure = $950m, and Change in NWC = $180m. Effective tax rate = 35%. Calculate the Operating Cash Flow and Free Cash Flow to the Firm. What is your interpretation of the computed FCF?
Part 2 Assume that EBIT = $1200m, Depreciation = $250m, Change in NPPE = $700m, Change in NWC = $120m. Effective tax rate = 35%. Calculate the Operating Cash Flow and Free Cash Flow to the Firm. What is your interpretation of the computed FCF? Hint: Capital Expenditure can be calculated as: Change in NPPE + Depreciation.
Explanation / Answer
Part 1:
Operating cash flow = EBIT(1-Tax) - Depreciation - Change in net working capital
= 1200m (1-0.35) - 250m - 180m
= $780m -250m-180m
= $350m
Therefore, the operating cash flows = $350m
Free cash Flow of the firm = OPerating cash flow - Capital Expenditure
= $350m - $950m
= - $600 m
Therefore, the free cash flow of the firm is -$600m.
It represents that the operating cash flows are insufficient to purchase the capital expenditure and for the balance of $600m the firm needs to obtain the loan to purchase the assets.
Part 2:
Operating cash flow = EBIT(1-Tax) - Change in net working capital
= 1200m (1-0.35) - 120m
= $780m - 120m
= $660m
Therefore, the operating cash flows = $660m
Free cash Flow of the firm = Operating cash flow - Capital Expenditure
= $660m - $250m - $700m
= - $290 m
Therefore, the free cash flow of the firm is -$290m.
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