FIN+4414+-+Free+Cash+Flow+-+Rebalancing+Example

FIN+4414+-+Free+Cash+Flow+-+Rebalancing+Example - = $2,500...

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FCF = OCF - NOWC - GFA If depreciation is zero, then FCF = NOPAT - NOWC - NFA 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 EBT $ 233.33 Less: Taxes - $ 93.33 Net Income $140.000 / .14 = $1,000 = Equity Firm Value = $170 / .085 = $2,000 => NPV = $0 __________ Free Cash Flow – Rebalancing Example Page 1 Year NOPAT NOWC NFA FCF 0 $0 -$500 -$1,500 -$2000 1 $170 $0 $0 $170 2 $170 $0 $0 $170 $170 $0 $0 $170 $170 $0 $0 $170
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Suppose NOPAT = $212.50 Firm Value = $212.50 / .085
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Unformatted text preview: = $2,500 => NPV = $500 (D = $1,000; S = $1,500) NOPAT $ 212.50 Required-$ 170.00 EVA $ 42.50 / .085 = $500 = NPV If NOPAT = $212.50, then EBIT = $212.50/.6 = $354.17 EBIT $ 354.17 Less: Interest-$ 50.00 EBT $ 304.17 Less: Taxes- $ 121.67 Net Income $ 182.50 / .14 = $1,303.57 Equity Firm Value = $212.50 / .085 = $2,500 => NPV = $500 Debt = $1,000/$2,500 = .40; Equity = $1,500/$2,500 = .60 WACC = 0.085 = (.03)(.4) + (r S )(.6) => (.085 - .012)/(.6) = .1217 = r S $182.50 / .1217 = $1,500 r S has decreased because the debt/equity ratio has decreased and there is less financial risk. __________ Alternatively, could rebalance to 50% debt ($1,250) and 50% equity ($1,250) Interest would now be ($1,250)(.05) = $62.50 EBIT $ 354.17 Less: Interest-$ 62.50 EBT $ 291.67 Less: Taxes- $ 116.67 Net Income $ 175.00 / .14 = $1,250.00 = Equity Free Cash Flow Rebalancing Example Page 2...
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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FIN+4414+-+Free+Cash+Flow+-+Rebalancing+Example - = $2,500...

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