Free Cash Flow - Rebalancing Example

Free Cash Flow - Rebalancing Example - FCF = OCF - NOWC -...

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Free Cash Flow – Rebalancing Example Page 1 FCF = OCF - Δ NOWC - Δ GFA If depreciation is zero, then FCF = NOPAT - Δ NOWC - Δ NFA Year NOPAT Δ NOWC Δ NFA FCF 0 $0 -$500 -$1,500 -$2000 1 $170 $0 $0 ? 2 $170 $0 $0 ? $170 $0 $0 ? $170 $0 $0 ? Financing: (1) $1,000 of debt financing at r D = 5%. Creditors require $50/year. If T=40%, then this will educe taxes by ($50)(.40) = $20. The net after- tax cost to the firm is then $50 - $20 = $30, or $30/$1,000 = 3%. Alternatively, after-tax cost = (r D )(1-T) = (5%)(1-.4) = 3%. (2) $1,000 of equity financing at r S = 14%. Stockholders will require $140/year. Total required by investors = $30 + $140 = $170 WACC = $170/$2,000 = 8.5% WACC = (.05)(1-.4)(.5) + (.14)(.5) = 1.5% + 7.0% = 8.5% __________ If NOPAT = $170, then EBIT = $170/.6 = $283.33 EBIT $ 283.33 Less: Interest -$ 50.00 / .05 = $1,000 = Debt EBT $ 233.33 Less: Taxes - $ 93.33 Net Income $140.000 / .14 = $1,000 = Equity Firm Value = $170 / .085 = $2,000 => NPV = $0
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Free Cash Flow – Rebalancing Example
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This note was uploaded on 02/11/2011 for the course FIN 3403 taught by Professor Tapley during the Spring '06 term at University of Florida.

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Free Cash Flow - Rebalancing Example - FCF = OCF - NOWC -...

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