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QUESTION 7 What's the FCFF of a company with total revenues of $50 million, operating profit...

QUESTION 7

  1. What's the FCFF of a company with total revenues of $50 million, operating profit margin of 40%, net profit margin of 8%, tax rate of 25% and reinvestment rate of 70%?

    a. $2.25 million

    b. $3.375 million

    c. $4.5 million

    d. $5.625 million

    e. $6.75 million
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Answer #1

We know,

FCFF= Operating profit after tax- Reinvestment needs

Calculation of operating profit after tax

Operating profit= Revenues*Operating profit margin

=$ 50 millions*40%= $20 millions

Operating profit after tax (NOPAT)= Operating profit before tax*(1-t)

= $ 20 millions*(1-0.25)= $15 millions

Calculation of reinvestments needs

Reinvestment needs= NOPAT*Reinvestment rate

=$15 millions* 70%= $10.5 millions

Therefore,

FCFF= $(15-10.5)millions= $4.5 millions

Answer: Option C

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