Question

What are the free cash flows of a firm with revenues of $600 million, net profit margin of 55%, operating profit margin of 20%, tax rate of 26%, reinvestment rate of 40%, and dividend payout rate of 5%?

a) $53.3 million b) $66.6 million c) $79.9 million d) $86.6 million e) $93.2 million

Answer 1

Operating profit = Revenue * Operating profit margin = 600*20%	120
Re-investment rate = ( Capital expenditure - Depreciation + Change in working capital ) / (Operating profit*(1-tax%))
40% = ( Capital expenditure - Depreciation + Change in working capital ) / (120*(1-26%))
40% = ( Capital expenditure - Depreciation + Change in working capital ) / 88.8
( Capital expenditure - Depreciation + Change in working capital ) = 40%*88.8	35.5
Free cash flows = Operating profit*(1-tax%) - ( Capital expenditure - Depreciation + Change in working capital ) = 120*(1-26%) - 35.5	53.3	Million