Question

During the coming year, Gold & Gold wants to increase its free cash flow (FCF) by $180 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

Increase in net working capital

Here, we’ve EBIT = $850 Million

Gross Capital Expenditure = $360 Million

Depreciation Expense = $120 Million

Increase in Free Cash Flow = $180 Million

Tax Rate = 40%

Free Cash Flow = EBIT(1 – Tax Rate) + Depreciation Expenses – Capital Expenditures – Increase in Net Working Capital

$180 Million = $850 Million(1 – 0.40) + $120 Million - $360 Million - Increase in Net Working Capital

$180 Million = $510 + $120 Million - $360 Million - Increase in Net Working Capital

Increase in Net Working Capital = $510 + $120 Million - $360 Million - $180 Million

Increase in Net Working Capital = $90 Million

“Therefore, the increase in net working capital would enable the firm to meet its target increase in FCF would be $90 Million”