Question

In FY2019, ABC Company has €60 million sales. An equity research analyst, working for an international investment brokerage house, has produced the following forecasts for FY2020: Sales Growth Rate = 8%, Earnings Before Interest and Taxes (EBIT) Margin = 20%, Effective Tax Rate = 30%, Depreciation & Amortization / Sales = 5%, Capital Expenditures / Sales = 7%, and Increase in Net Working Capital / Sales = 1%. Based on the above information, calculate the projected Free Cash Flows to the Firm (FCFF) of ABC Company for FY2020:

Select one:

a. 12,960,000

b. 17,496,000

c. 648,000

d. 7,128,000

e. 8,424,000

Answer 1

Step 1: Computation of the sales in F.Y 2020

Sales in F.Y 2019 = 60 Million Euro

Sales in F.Y 2020= Previous year sales + 8% Growth rate

= 60 MillionEuro + 60*8%

=60 Million Euro + 4.8 Million Euro

= 64.8 Million Euro

Step 2: Computation of EBIT

EBIT = 20% on sales

= 64.8 * 20%

= 12.96 Million Euros

Step 3: Computation of Depreciation Amount

Depreciation = 5% on sales

= 64.8 * 5%

= 3.24 Milllion Euros

Step 4:Calculation of Capital Expenditure

  Capital Expenditure = 7% on sales

= 64.8*7%

= 4.536 Milion Euros

Step 5: Calculation of increase in Net Working Capital

Increase in Net working Capital = 1% on sales

= 64.8*1%

= 0.648 Million Euros

Step 6: Computation of the Free Cash flows to the firm

S.No	Particulars	Amount( Million Euro)
A	EBIT	12.96
B	less : Taxes @ 30%	3.888
C	EAT ( Earning after tax)( A-B)	9.072
D	Depreciation	3.24
E	Capital Expenditure	4.536
F	Increase in Working Capital	0.648
G	Free Cash flows( C+D-E-F)	7.128

* Free Cash flows = Earnings after Tax + Depreciation - Capital Expenditure - Increase in working Capital

Hence Free Cas flow to the firm is 71,28000 Euros. So option d) is the Correct answer.