Question

Eagle product’s EBIT is $300, its tax rate is 35%, depreciation is $20, capital expenditure are $60, and the planned increase in net working capital is $30.The interest expense is $10 and the panned increase in debt is $5.

(a) What is the free cash flow to the firm?

(b) What is the free cash flow to equity?

Using FCFE to solve a two-stage valuation

Answer 1

EBIT = $300

Tax rate= 35%

Interest expanse = $10

We will calculate Net income,

Net Income = (EBIT- Interest)*(1-tax rate)

So

Net income = (300-10) (1-35%)

Net income =290*65%

Net income = $ 188.5

Now we come to Questions:

(a). Free cah flow to the firm or (FCFF)

FCFF = EBIT (1- tax rate) + Depreciation - Long term investment -Investment in working capital

So here

FCFF = 300 (1-35%) + 20 - 60 - 30

FCFF = 195 +20 - 60- 30

FCFF = $ 125

(b)

Free cash flow to equity or (FCFE)

FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment.

So here

FCFE = 188.5-60-30+5-0

FCFE = $ 103.5

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