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What's the FCFF of a company with total revenues of $843 million, operating profit margin of...

What's the FCFF of a company with total revenues of $843 million, operating profit margin of 32%, tax rate of 31% and reinvestment rate of 37%? Answer in millions, rounded to one decimal place.

Solutions

Expert Solution

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.


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