Question

Question 24

What are the free cash flows of a firm with revenues of $600 million, net profit margin of 55%, operating profit margin of 30%, tax rate of 26%, reinvestment rate of 40%, and dividend payout rate of 5%?

		a) $53.3 million
		b) $66.6 million
		c) $79.9 million
		d) $86.6 million
		e) $93.2 million

Answer 1

We can calculate the Free cash flows of the firm with the given information as follow:

Total revenue = $ 600 million

Operating Profit Margin = 30%

Tax rate = 26%

Reinvestment rate = 40%

Free cash Flows = Net Operating Profit after Tax - Reinvestment

Net Operating Profit after tax = Total revenue * Operating Profit Margin * ( 1 - Tax rate)

= 600 * 30% * ( 1 - 26% )

= 180 * 0.74

= $ 133.20 Million

Reinvestment = Net Operating Profit after Tax * Reinvestment rate

= 133.20 * 40%

= $ 53.28 Million

Now as per the formula of Free cash flows = Net Operating Profit after Tax - Reinvestment

= 133.20 - 53.28

= $ 79.92 Million

So, the Free Cash Flows come out to be $ 79.92 Million. Therefore the correct answer is option (c)

Hope I was able to solve your concern. If you are satisfied hit a thumbs up !!