Question

During the coming year, Gold & Gold wants to increase its free cash flow (FCF) by $200 million, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: EBIT is projected to equal $850 million. Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. The tax rate is 40%. There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

The amount is computed as shown below:

The FCFF is computed as follows:

FCFF = EBIT x  (1-Tax rate) + Depreciation - Change in Working capital - Change in Capital Expenditure

$ 200 million = $ 850 million x (1 - 0.40) + $ 120 million - Change in Working capital - $ 360 million

$ 200 million = $ 270 million - Change in Working capital

Change in Working capital = $ 70 million

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