Question

Answer each of the following three cases

1. XX firm is a full-service truck leasing, maintenance, and rental firm with operations in North America and Europe. The following are selected numbers from the financial statements for 1992 and 1993 (in millions).

Revenues

(Less) Operating Expenses (Less) Depreciation

= EBIT

(Less) Interest Expenses (Less) Taxes

= Net Income

Working Capital

Total Debt

1992

$5,192.0 ($3,678.5) ($573.5) $940.0 ($170.0) ($652.1) $117.9 $92.0 $2,000 mil

1993

$5,400.0 ($3848.0) ($580.0) $972.0 ($172.0) ($670.0) $130.0 <$370.0> $2,200 mil

The firm had capital expenditures of $800 million in 1992 and $850 million in 1993. The working capital in 1991 was $34.8 million, and the total debt outstanding in 1991 was $1.75 billion. There were 77 million shares outstanding, trading at $29 per share.

C. Assuming that revenues and all expenses (including depreciation and capital expenditures) increase 6%, and that working capital remains unchanged in 1994, estimate the projected cash flows to equity and the firm in 1994. (The firm is assumed to be at its optimal financial leverage

Answer 1

Tax rate = 84% (approximately)

1994

Revenue = 5400*(1+6%) = 5724

(Less) Operating expenses = (3848*1.06) = (4078.88)

(Less) Depreciation = (580*1.06) = (614.8)

EBIT = 5724-4078.88-614.8 = 1030.32

Interest expense = 172

EBT = 1030.32-172 = 858.32

PAT = 858.32*(1-84%) = 137.33

Capex = 850*1.06 = 901

Changes in Working capital = 0

Changes in net debt = 0 (firm is at optimal capital structure)

FCFE = PAT + Dep - Capex - Working capital changes - Changes in net debt

FCFE = 137.33+614.8-901-0-0 = -$148.87 million

FCFF = EBIT*(1-TAX) + Dep - Capex - Working capital changes

FCFF = 1030.32*(1-84%)+614.8-901-0 = -$121.35 million