Question

Polar Inc. generated $30 million in net income on revenues of $120 million during the course of the most recent year. You expect revenues to grow 10% a year next year and margins to stay stable. The firm’s non-cash current assets are $42 million and its current liabilities are $30 million, and non-cash working capital as a percent of revenues is expected to remain unchanged next year. If the net cap ex is expected to be $10 million next year, what is your estimate of the FCFE for the next year?

Answer 1

The estimated Free Cash Flow to Equity (FCFE) for Polar Inc. for the next year is calculated as $18.8 million by using the projected net income, factoring in growth and margins, and accounting for changes in non-cash working capital and net capital expenditures.

Step-by-step explanation:

The student has asked for an estimate of the Free Cash Flow to Equity (FCFE) for the next year for Polar Inc., given certain financial metrics and projections. To calculate the FCFE, we follow the formula: FCFE = Net Income - (Net Capital Expenditures + Change in Non-Cash Working Capital) + New Debt Issued - Debt Repayments. As we are not provided with information on debt issuance or repayments, we will assume they are zero for this calculation. We begin with the projected net income, which can be estimated by applying the expected growth rate to the current net income. With a 10% growth expectation and stable margins, next year's net income would be $30 million * 1.10 = $33 million.

Next, we calculate the non-cash working capital for the next year by applying the stable percentage of non-cash working capital to revenues to the projected revenues for next year, which are $120 million * 1.10 = $132 million. Therefore, the projected non-cash working capital is ($42 million / $120 million) * $132 million = $46.2 million. The change in non-cash working capital is $46.2 million - $42 million = $4.2 million.

Lastly, subtract the net capital expenditures ($10 million) and the increase in non-cash working capital ($4.2 million) from the projected net income ($33 million) to arrive at the FCFE: $33 million - ($10 million + $4.2 million) = $18.8 million. So, the FCFE for the next year is estimated to be $18.8 million.