Question

Consider a company that is projected to generate revenues of $357 million next year. Analysts expect revenues to grow at a 4.0% annual rate for the following two years (until the end of year 3) and then at a stable rate of 2.8% in perpetuity. If the company is expected to have a gross margin of 75%, operating margin of 54%, net margin of 25%, tax rate of 10.2%, and reinvestment rate of 37%, what is its expected free cash

Answer 1

To calculate the expected free cash flow, you need to first calculate the projected revenues for the next three years. Then, you can calculate the net income by multiplying the revenues by the net margin. After deducting taxes, you can calculate the after-tax profits and finally the expected free cash flow using the reinvestment rate.

Step-by-step explanation:

To calculate the expected free cash flow, we need to first calculate the projected revenues for the next three years. Next, we calculate the net income by multiplying the revenues by the net margin. After that, we subtract the taxes by multiplying the net income by the tax rate. Then, we calculate the after-tax profits by subtracting the taxes from the net income. Finally, we calculate the expected free cash flow by multiplying the after-tax profits by the reinvestment rate.

Let's break it down:

1. Projected revenues for year 1: $357 million
2. Projected revenues for year 2: $357 million * 1.04 = $371.28 million
3. Projected revenues for year 3: $371.28 million * 1.04 = $386.18 million
4. Net income for year 1: $357 million * 0.25 = $89.25 million
5. Net income for year 2: $371.28 million * 0.25 = $92.82 million
6. Net income for year 3: $386.18 million * 0.25 = $96.55 million
7. Taxes for year 1: $89.25 million * 0.102 = $9.10 million
8. Taxes for year 2: $92.82 million * 0.102 = $9.48 million
9. Taxes for year 3: $96.55 million * 0.102 = $9.86 million
10. After-tax profits for year 1: $89.25 million - $9.10 million = $80.15 million
11. After-tax profits for year 2: $92.82 million - $9.48 million = $83.34 million
12. After-tax profits for year 3: $96.55 million - $9.86 million = $86.69 million
13. Expected free cash flow for year 1: $80.15 million * 0.37 = $29.67 million
14. Expected free cash flow for year 2: $83.34 million * 0.37 = $30.82 million
15. Expected free cash flow for year 3: $86.69 million * 0.37 = $32.06 million