Question

A firm's cash flow from operations is $40 million, depreciation is $2 million, its investments in...

A firm's cash flow from operations is $40 million, depreciation is $2 million, its investments in fixed capital totals $14 million, its after-tax interest totals $4 million and its investment in working capital totals $4 million. During the year the firm borrowed $5 million. The tax rate is 30%. What is its Free Cash Flow to Equity? Select one:

a. $41.00 million

b. $31.00 million

c. $29.00 million

d. $42.20 million

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Answer #1

Sol:

Cash flow from operations = $40 million

Depreciation = $2 million

Fixed capital investment = $14 million

Working capital investment = $4 million

Borrowing = $5 million

To determine free cash flow from equity (FCFE):

FCFC = Cash flow from operations + Depreciation - Fixed capital investment - Working capital expense + Borrowing

FCFC = $40 million + $2 million - $14 million - $4 million + $5 million

FCFC = $29 million

Therefore free cash flow from equity is $29 million

Answer is c. $29 million

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