Ch03_Solutions

Ch03_Solutions - Chapter 3 Free Cash Flow Valuation...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
FCFF = 785(1 – 0.40) + 180(0.40) – 349 – 38 FCFF = 471 + 72 – 349 – 38 = $156 million B. The simplest approach is to calculate FCFF from CFO, EBIT, or EBITDA as was done in Part A above, and then to find FCFE by making the appropriate adjustments to FCFF: FCFE = FCFF – Int(1 – Tax rate) + Net borrowing. FCFE = 156 – 130(1 – 0.40) + 50 = 156 – 78 + 50 = $128 million You can also find FCFE using CFO, EBIT, or EBITDA directly. Starting with CFO, using Equation 3-11, FCFE is FCFE = CFO – FCInv + Net borrowing FCFE = 427 – 349 + 50 = $128 million Starting with EBIT, FCFE (found with an equation derived in Footnote 9) is FCFE = EBIT(1 – Tax rate) + Dep – Int(1 – Tax rate) – FCInv – WCInv + Net borrowing FCFE = 605(1 – 0.40) + 180 – 130(1 – 0.40) – 349 – 38 + 50 FCFE = 363 +180 – 78 – 349 – 38 + 50 = $128 million Finally, starting with EBITDA, FCFE (found with an equation derived in Footnote 9) is FCFE = EBITDA(1 – Tax rate) + Dep(Tax rate) – Int(1 – Tax rate) – FCInv – WCInv + Net borrowing FCFE = 785(1 – 0.40) + 180(0.40) – 130(1 – 0.40) – 349 – 38 + 50 FCFE = 471 + 72 – 78 – 349 – 38 + 50 = $128 million 4 A. FCF = Net income + Depreciation and amortization – Cash dividends – Capital expenditures. This definition of FCF is sometimes used to determine how much “discretionary” cash flow management has at its disposal. Management discretion concerning dividends is limited by investor expectations that dividends will be maintained. Comparing this definition with Equation 3-7, FCFF = NI + NCC + Int(1 – Tax rate) – FCInv – WCInv FCFF includes a reduction for investments in working capital and the addition of after-tax interest expense. Common stock dividends are not subtracted from FCFF because doing so represents a distribution of the cash available to investors.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 12

Ch03_Solutions - Chapter 3 Free Cash Flow Valuation...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online