A firm currently has sales per share of $10.00, and expects sales to grow by 25% next year. The net profit margin is expected to be 15%. Fixed capital investment net of depreciation is projected to be 65% of the sales increase, and working capital requirements are 15% of the projected sales increase. Debt will finance 45% of the investments in net capital and working capital. The company has an 11% required rate of return on equity. What is the firm’s expected free cash flow to equity (FCFE) per share next year under these assumptions? A) $0.38. B) $1.88. C) $0.77. Your answer: B was incorrect. The correct answer was C) $0.77. FCFE = net profit – NetFCInv – WCInv + DebtFin = $1.88 – $1.63 – 0.38 + 0.90 = 0.77 where r they getting that .9 from? I tried this problem using: FCFE = NI - (1-D/A)(FCINV-DEP) - (1-D/A)(NWC) = 1.875 - (.55)(1.625) - (.55)(.375) and got $1.188 Shouldn’t the answer with their method, even if it right, be the same answer as the way I did it?
they are using FCFE = NI + D&A - FCCInv - WCInv + Net Borrowing. NI = net profit margin x exp sales = 0.15 x (10 x 1.25) = 1.875 Since everything is net of D&A, its factored in already to the other components FCCInv = 0.65 x (12.50 - 10) = 1.625 WCInv = .15 * (12.50 - 10) = 0.375 Net borrowing = 0.45 x (1.625 + 0.375) = 0.9 FCFE = 1.875 + 0 - 1.625 - 0.375 + 0.90 =0.775 = 0.78 Edit ( arithmetic gives you 0.775 which rounds to 0.78)
NI=10*1.25*.15=1.875 NI-(1-DR)*(FCInv-Depr+WCInv) = 1.875 - 0.55 * [(0.65+0.15)*.25*10] = 0.775 You have punched some number key + or - wrong. I get 0.775 the way you have done it as well.
The way you did it originally should also work. I think you must have a calculation error, cause I get 0.775.
NI=1.875 sales increase= 2.5 FCinv = 1.625 WCinv =.375 FCFE= NI-(1-DR)NET fixed asssets =1.875- .55(1.625+.375) = .775
I tried this problem using: FCFE = NI - (1-D/A)(FCINV-DEP) - (1-D/A)(NWC) = 1.875 - (.55)(1.625) - (.55)(.375) and got $1.188 Shouldn’t the answer with their method, even if it right, be the same answer as the way I did it? How did you get 1.188, when I do the math with your problem I come out with .775
he has done a +0.55*0.375 instead…
just did the math wrong, i get .77 now. thanks as always cpk and others.
the show NY Wrote: ------------------------------------------------------- > A firm currently has sales per share of $10.00, > and expects sales to grow by 25% next year. The > net profit margin is expected to be 15%. Fixed > capital investment net of depreciation is > projected to be 65% of the sales increase, and > working capital requirements are 15% of the > projected sales increase. Debt will finance 45% of > the investments in net capital and working > capital. The company has an 11% required rate of > return on equity. What is the firm’s expected free > cash flow to equity (FCFE) per share next year > under these assumptions? > > A) $0.38. > > B) $1.88. > > C) $0.77. > > > Your answer: B was incorrect. The correct answer > was C) $0.77. > > FCFE = net profit – NetFCInv – WCInv + DebtFin = > $1.88 – $1.63 – 0.38 + 0.90 = 0.77 > > > > where r they getting that .9 from? > > I tried this problem using: > > FCFE = NI - (1-D/A)(FCINV-DEP) - (1-D/A)(NWC) = > 1.875 - (.55)(1.625) - (.55)(.375) and got $1.188 > > Shouldn’t the answer with their method, even if it > right, be the same answer as the way I did it? I didn’t use that method. I just kindof figured it out by knowing how cash flows and ratios work. S/Share*NI/S = EPS - 1.875. Now 2.5 is the increase in sales so 65% of that is FCInv and 15% of that is WCINV. These equal 1.625, and .375. FCFE = NI + Dep. - FCinv - WCinv + Net Borrowing Net Borrowing: .73125 and .16875 (get by same was as you did with sales but apply accordingly). use above formula and you get .775