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Ch03_Solutions - Chapter 3 Free Cash Flow Valuation...

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Chapter 3 – Free Cash Flow Valuation Solutions 1. $100 increase in: Change in FCFF Change in FCFE A. Net income +100 +100 B. Cash operating expenses –60 –60 C. Depreciation +40 +40 D. Interest expense 0 –60 E. EBIT +60 +60 F. Accounts receivable –100 –100 G. Accounts payable +100 +100 H. Property, plant, and equipment –100 –100 I. Notes payable 0 +100 J. Cash dividends paid 0 0 K. Shares issued 0 0 L. Share repurchases 0 0 2. A. Free cash flow to the firm, found with Equation 3-7, is FCFF = NI + NCC + Int(1 – Tax rate) – FCInv – WCInv FCFF = 285 + 180 + 130(1 – 0.40) – 349 – (39 + 44 – 22 – 23) FCFF = 285 + 180 + 78 – 349 – 38 = $156 million B. Free cash flow to equity, found with Equation 3-10, is FCFE = NI + NCC – FCInv – WCInv + Net borrowing FCFE = 285 + 180 – 349 – (39 + 44 – 22 – 23) + (10 + 40) FCFE = 285 + 180 – 349 – 38 + 50 = $128 million C. To find FCFE from FCFF, use the relationship in Equation 3-9 FCFE = FCFF – Int(1 – Tax rate) + Net borrowing FCFE = 156 – 130(1 – 0.40) + (10 + 40) FCFE = 156 – 78 + 50 = $128 million 3. A. To find FCFF from CFO, EBIT, or EBITDA, the analyst can use Equations 3-8, 3-12, and 3-13. To get FCFF from CFO: FCFF = CFO + Int(1 – Tax rate) – FCInv FCFF = 427 + 130(1 – 0.40) – 349 = 427 + 78 – 349 = $156 million To get FCFF from EBIT: FCFF = EBIT(1 – Tax rate) + Dep – FCInv – WCInv FCFF = 605(1 – 0.40) + 180 – 349 – 38 FCFF = 363 + 180 – 349 – 38 = $156 million Finally, to obtain FCFF from EBITDA: FCFF = EBITDA(1 – Tax rate) + Dep(Tax rate) – FCInv – WCInv 1
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