ACF 1: Valuation: IA2
Problem 1: Elmdale Enterprise’s FCF:
When valuing the operations of a firm using a discounted cash flow model, the operating cash flow – unlevered free cash flow (UFCF) - is needed.
The free cash flow calculation in equation form:
Operating Income (EBIT) = Revenues – Cash Costs – Depreciation Expense
EBIAT = EBIT – Taxes, where Taxes = (tax rate) * (EBIT)
UFCF = EBIAT + Depreciation Expense – CAPEX – Increase in NWC
Therefore: UFCF Yr 1 = (565 – 400 - 50) * (1-0.35) + 50 – 40 – 25
= $59.75mn
UFCF Yr 2 = (626 – 475 – 60) * (1- 0.35) + 60 -50 +5
= $74.15mn
Problem 2: Estimating Free Cash Flows:
a. Calculate the FCF for the year 2012:
Increase in net fixed assets in 2012 = 2696 – 2142 = $554mn
NWC end of 2012 = CA - CL (Acc/Paybl and Accrued Expenses) =
[1374 – 299] – 1105 + 423 = $393
NWC end of 2011 = CA - CL (Acc/Paybl and Accrued Expenses) =
[1397- 404] – 882 -200 = ($311) ie a negative NWC
Increase in NWC during 2012 = 393 – 311 = $82
FCF = NOPAT – increase in NFA – increase in NWC
NOPAT = 383.46, increase in NFA = 554, increase in NWC = 82
Therefore: FCF = -252.54 = ($252.54) ie a negative FCF
b. Fill out the Cash flow statement.
Cash Flow Statement
- Net Income
383
Earnings Statement 2012
- Depreciation
104
Earnings Statement 2012
- Change in CL
223
- Change in CA
(82) ie -82
Cash Flow from Operations
346
Σ (NI, Dep., ΔCL, ΔCA)
- Investment in Fixed Assets
(554)
(2696-2142)
Cash Flow from investment
658
554 + Depreciation
- Increase in common stock
25
Balance Sheet
- Increase in long-term debt
(50)
Balance Sheet
- Dividends paid
(50)
Earnings Statement 2012
Cash Flow from Financing
(75)
Σ (ΔCS, ΔLTD, Div.)
Change in Cash Balance
(105)
c. This firm is considering repurchasing shares to the extent of $150. But this would mean that it will have to borrow additional short term debt from banks so as to...