Question

1.) What is the free cash flow of a firm with revenues of $357 million, operating profit margin of 34%, tax rate of 32%, depreciation and amortization expense of $22 million, capital expenditures of $38 million, acquisition expenses of $6 million and change in net working capital of $18 million? Answer in millions, rounded to one decimal place (e.g., $245.63 = 245.6).

2.) You are valuing Soda City Inc. It has $139 million of debt, $74 million of cash, and 189 million shares outstanding. You estimate its cost of capital is 9.1%. You forecast that it will generate revenues of $731 million and $769 million over the next two years. Projected operating profit margin is 36%, tax rate is 22%, reinvestment rate is 51%, and terminal exit value multiple at the end of year 2 is 10. What is your estimate of its share price? Round to one decimal place. ​[Hint: Compute projected FCFF for years 1 and 2 based on info provided, compute terminal value using the exit multiple method, discount it all to find EV, walk the bridge to Equity, divide by number of shares outstanding.]

Answer 1

Free Cash Flow to Firm (FCFF) is derived using the following formula :-

FCFF = EBIT * (1-tax rate) + Depreciation - Fixed Capital Investment - Working Capital Investment

EBIT refers to Earnings before Interest and Taxes or Operating Profit.

Note: In this problem, acquisition costs have also been given. We have assumed that acquisition costs are equivalent to capex and included them in our calculation

Attaching the calculations and the formulas used :-

FCFF = $42.5 million