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%?
Operating profit = sales revene x operating profit margin
= $600 million x 20% = $120 million
After tax operating profit = operating profit x (1- tax rate)
= $120 million x (1-0.26) = $88.80 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 ) / 88.80
(capital expenditure - depreciation + change in working capital ) = $35.52 million
Free cashflow = operating profit (1-tax rate) - (capital expenditure - depreciation + change in working capital )
= $88.80 million- $35.52 million
Free cashflow =$53.28
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