Question

Suppose you are estimating a growth rate of FCF within the corporate value model. You noticed that the firms FCF has been declining in the past three years while its NOPAT and operating capital have been steadily increasing over the same time period. 1) What could be the reason for the decline in FCFs, and 2) what can you say, in general, about the future FCF growth rate?

Answer 1

1]

FCF = NOPAT + depreciation - capital expenditure - change in operating capital

If the FCF has been declining while NOPAT and operating capital have been increasing, it means that capital expenditure has been increasing over the past few years. T

The reason for declining FCF is increasing capital expenditure

2]

future FCF growth rate is likely to be higher. This is because capital expenditure has been increasing over the past few years, which means that the earning capacity and return-generating assets of the firm have increased. This increased asset base is likely to support a higher growth rate in the future.