Question

6. 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%?

Need help on this. Any help would be greatly appreciated.

Answer 1

Operating profit = sales revene x operating profit margin

= $600 million x 30% = $180 million

After tax operating profit = operating profit x (1- tax rate)

= $180 million x (1-0.26) = $133.2 million

Reinvestment rate = (capital expenditure - depreciation + change in working capital ) / { operating profit ) x (1-tax rate)}

0.40 = (capital expenditure - depreciation + change in working capital ) / 133.20

(capital expenditure - depreciation + change in working capital ) = $53.28 million

Free cashflow = operating profit (1-tax rate) - (capital expenditure - depreciation + change in working capital )

= $133.20 million - $53.28 million

Free cashflow =$79.92

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