In: Finance
Solution:-
In the given question,
Operating profit= Revenues*operating profit margin
Operating profit= $843*32%= $269.8 million
Since the question has given no information about debt or interest, hence we assume that the entire business is equity funded, and therefore earnings after taxes is as follows:
Earnings after tax= Operating profit*(1-tax rate)= $269.8*(1-31%)= $186.1 million
Reinvestment rate refers to the % of earnings after tax that is reinvested in business as working capital and capex. In case of a business funded by both debt and equity, FCFF is as follows:
FCFF= Earnings after taxes + interest*(1-tax rate) - Capex - Investment in working capital
However, since there is no debt given in case of question, FCFF in case of completely equity funded business is defined as follows:-
Free cash flow to firm (FCFF)= Earnings after tax- reinvestment in capex and working capital= $186.1 - ($186.1*37%)= $117.3 million.