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 35%, and dividend payout rate of 5%?

Answer 1

Operating profit = Revenue * Operating profit margin = 600*30%	180
Re-investment rate = ( Capital expenditure - Depreciation + Change in working capital ) / (Operating profit*(1-tax%))
35% = ( Capital expenditure - Depreciation + Change in working capital ) / (180*(1-26%))
35% = ( Capital expenditure - Depreciation + Change in working capital ) / 133.2
( Capital expenditure - Depreciation + Change in working capital ) = 35%*133.2	46.6
Free cash flows = Operating profit*(1-tax%) - ( Capital expenditure - Depreciation + Change in working capital ) = 180*(1-26%) - 46.6	86.6	Million