Question

Free cash inc. is anticipated to make earnings before interest and taxes (ebit) of , , and in each of the next three years. Depreciation is estimated to be , , and in each of the next three years. Capital expenditures are estimated to be , , and in each of the next three years. Incremental increases in working capital requirements are estimated to be , , and in each of the next three years. Free cash inc.'s tax rate is percent. Estimate the free cash flows to the firm for Free Cash Inc. for each of the next three years?

Answer 1

To calculate the free cash flows to the firm, subtract taxes, change in working capital, and capital expenditures from EBIT and add depreciation in each year.

Step-by-step explanation:

Free Cash Flows to the Firm

Free cash flows to the firm can be calculated using the formula:

FCFF = EBIT - Taxes + Depreciation - Change in Working Capital - Capital Expenditures

Given the following estimates:

• EBIT: $10 million, $15 million, and $20 million for the next three years respectively
• Depreciation: $2 million, $3 million, and $4 million for the next three years respectively
• Working Capital Requirements: $1 million, $2 million, and $3 million for the next three years respectively
• Capital Expenditures: $5 million, $6 million, and $7 million for the next three years respectively
• Tax Rate: 30%

Calculation for the first year:

FCFF = $10 million - (30% * $10 million) + $2 million - $1 million - $5 million = $4 million

Similarly, calculate FCFF for the second and third years.