Question

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

Answer 1

Operating profit = Sales Revenue*Operating profit margin

= $600 million*30%

= $180 million

After tax Operating Profit = Operating profit(1-Tax rate)

= $180 million(1-0.26)

= $133.2 million

Re-investment Rate = (Capital Expenditure - Depreciation + Change in Working Capital)/Operating profit(1-Tax rate)

0.40 = (Capital Expenditure - Depreciation + Change in Working Capital)/$133.2 million

(Capital Expenditure - Depreciation + Change in Working Capital) = $ 53.28 million

Free- Cash flow = Operating profit(1-Tax rate) - (Capital Expenditure - Depreciation + Change in Working Capital)

= $ 133.2 million - $ 53.285 million

= $79.92 million

Hence, Option C

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