AmazDeal is an integrated company. The following information is taken from its i

Question

AmazDeal is an integrated company. The following information is taken from its income statements for 2009 and 2010 (all dollar figures are in millions):
2009
Sales: $240,000; cost of goods sold: 54% of sales, depreciation: $16,000, CAPEX: $6,000, additional investment in net working capital: $1,200
2010
Sales: $267,000, cost of goods sold: 55% of sales, depreciation: $17,200, CAPEX: $6,750, additional investment in net working capital: $1,350
Applicable tax rate for the company is 35%.
Calculate company’s free cash flows (FCF) for 2009 and 2010
Estimate company’s FCF for 2011-2015 using the following assumptions:
Company’s sales will grow at 4% per year over the next five years;
Cost of goods sold as a percentage of sales is expected to increase by 1% each year, i.e., the gross margin ratio will be decreasing by 1% every year;
Total CAPEX each year is expected to be equal to 25% of additional sales that year (compared to the previous year);
Increase in net working capital in a given year will be equal to 5% of additional sales that year (compared to the previous year);
Total depreciation each year will be equal to the total depreciation in a prior year plus 20 % of CAPEX incurred in a prior year (for example, depreciation in 2010 was 16,000 + 20% x 6,000 = 17,200). Since the company is a going concern we need not be concerned about the liquidation value of the firm’s assets at the end of 2015.

Explanation / Answer

gG ($ figures in $ 000,000) 2009 2010 Sales $240,000 $267,000 Cost of Goods Sold (% of sales) 54% 55% Depreciation $16,000 $17,200 CAPEX $6,000 $6,750 Increase in Net Working Capital $1,200 $1,350 Tax Rate 35% 35% Information for 2010-2014: Sales growth rate next 5 years 4% per year COGS growth rate (as percentage of sales) 1% per year CAPEX 25% of additional sales Change in net working capital 5% of additional sales Depreciation 20% of CAPEX + last year level Tax rate 35% Solution a. FFCF Calculations for 2009-2010 Year 2009 2010 Sales $240,000 $267,000 Cost of Goods Sold Depreciation $(16,000) $(17,200) EBIT EBIT(1-T) = NOPAT Plus: Depreciation Expense $16,000 $17,200 Less: CAPEX $6,000 $6,750 Less: Working Capital Investment $1,200 $1,350 Firm Free Cash Flow b. Estimated FFCF for 2011-2015 Year 2010 2011 2012 2013 2014 2015 Sales $267,000 Cost of Goods Sold Depreciation EBIT EBIT(1-T) = NOPAT Plus: Depreciation Expense Less: CAPEX Less: Working Capital Investment Firm Free Cash Flow

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