Question

Question 7 Unanswered. 3 attempts left What's the FCFF of a company with total revenues of $814 million, operating profit margin of 36%, tax rate of 29% and reinvestment rate of 46%? Answer in millions, rounded to one decimal place. Type your response Submit

Answer 1

7. FCFF = After tax operating income - Reinvestment

Here, After tax operating income = 814 * 0.36 * (1 - 0.29) = $ 208.0584 mn

Reinvestment rate = 46%

Reinvestment amount = $ 208.0584 * 0.46 = $ 95.706 mn

FCFF = $ 208.0584 - $ 95.706 = $ 112.3524 mn

8. Constant growth rate(g) = 2.1%

FCFF1 = $ 33 MN

Debt = $ 31 mn

Cash = $ 6mn

Cost of capital = 12.3%

Shares outstanding = 16 mn

Value of operating assets = (FCFF1) / (Cost of capital - Growth rate) = (33)/(0.123 - 0.021)) = $ 323.59 mn

Total value of the firm = Value of operating assets + Cash - Debt = 323.59 + 6 - 31 = $ 298.59

Per share value = 298.59 / 16 = $ 18.7

9. FCFF1 = $ 714 mn

FCFF2 = $ 714 mn

FCFF3 = $ 714 mn

This FCFF3 will grow at a constant rate of 2.1%

This property of FCFF3 allows us to use the constant growth model formula that we had used in the previous question.

So, Value at year-2, P2 = 714 / (0.099 - 0.021) = $ 9,153.85 mn

So CF1 = 714 mn, CF2 = 9153.85 + 714 = 9,867.85 mn

Discounting this with 9.9% will give us the value of the operating assets as $ 8,819.74 mn

Total value of the firm = Value of operating assets + Cash - Debt = 8,819.74 + 73 - 143 = $ 8,749.74

Per share value = 8749.74 / 171 = $ 51.2

10.

9. FCFF1 = $ 414 mn

FCFF2 = $ 414 * 1.049 = 434.286 mn

FCFF3 = $ 434.286 * 1.049 = 455.566 mn

This FCFF3 will grow at a constant rate of 2.6%

This property of FCFF3 allows us to use the constant growth model formula that we had used in the previous question.

So, Value at year-2, P2 = 455.566 / (0.111 - 0.026) = $ 5,359.6 mn

So CF1 = 414 mn, CF2 = 434.286 + 5359.6 = 5,793.866 mn

Discounting this with 11.1% will give us the value of the operating assets as $ 4,714.78 mn

Total value of the firm = Value of operating assets + Cash - Debt = 4714.78 + 29 - 236 = $ 4,507.78 mn

Per share value = 4507.78 / 157 = $ 28.7