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Free Cash Flow - Rebalancing Example

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

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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 - FCF = OCF NOWC GFA...

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