Question

Company X went public at the start of 2017. At the time of the IPO the company:

 Issued 200M shares of stock at $25 per share (thus raising $500M in equity)

 Issued $400M of long term debt; as part of this interest only loan, the company agreed to pay creditors 15.0% per year; this implies the current portion of long term debt is $0 in 2017/2018

At the end of 2017, Company X issued financial statements. A complete summary is below:

 $400M in sales, $260M in operating earnings, and $160 in net income

 $500M Gross PPE , $450 Net PPE  Working Capital of $430, excluding marketable securities  The company paid a dividend of 30 cents per share

 Investors were pleased with the results; Company X’s share price closed at $28 per share

At the end of 2018, Company X issued financial statements. A complete summary is below:

 $480M in sales, $300M in operating earnings, and $200 in net income

 $600M Gross PPE , $490 Net PPE  Working Capital of $460, excluding marketable securities

 The company paid a dividend of 40 cents per share  Investors were pleased with the results; Company X’s share price closed at $33 per share

Throughout 2017 and 2018:

 The company did not issue or repurchase any shares of stock other than during the IPO

 The company did not issue or retire any long term debt other than during the initial debt offering

Assume that CFO was $250. Calculate fixed capital investment as the year on year change in Gross PPE. In 2018, Company X’s Free cash Flow to Firm was closest to:
a. $110

b. $150

c. $170

d. $190

e. $210

Answer 1

A	B	C	D	E	F	G	H	I	J	K
2
3		Free Cash Flow can be calculated using the following formula:
4
5		Free Cash Flow (FCF)	=Operating Cash Flow - Capital Expenditure - Change in net working capital
6
7		Capital Expenditure	=Gross PPE in 2018 - Gross PPE in 2017
8			=$600 - $500
9			$100
10
11		Change in Net Working capital	=Working capital in 2018 - Working capital in 2017
12			=460-430
13			$30
14
15		Operating Cash flow	250	(Given)
16
17		Free Cash Flow (FCF)	=Operating Cash Flow - Capital Expenditure - Change in net working capital
18			=250-100-30
19			$120
20
21		Hence the free cash flow is closest to option (a).
22