Caballos, Inc., has a debt to capital ratio of 41%, a beta of 1.9 and a pre-tax
ID: 2734907 • Letter: C
Question
Caballos, Inc., has a debt to capital ratio of 41%, a beta of 1.9 and a pre-tax cost of debt of 6.7%. The firm had earnings before interest and taxes of $ 653 million for the last fiscal year, after depreciation charges of $ 210 million. The firm had capital expenditures of $ 370 million, and non-cash working capital increased by $ 21 million. The firm also had a book value of capital of $ 1.5 billion at the beginning of the last fiscal year. (The treasury bond rate is 3.2 %, the market risk premium is 5.6 % and the firm has a tax rate of 40 %). Assume that the firm is in stable growth, and that the return on capital and reinvestment rates for the last fiscal year can be sustained forever. Estimate the FCFF.
Explanation / Answer
We have following formula for FCFF:
FCFF = EBIT x (1-t) + Depreciation – change in net working capital – change in capital expenditure
= 653 million x ( 1-0.40) + 210 million – 21 million -370 million
= 391.80 million – 181 million
= 210.80 million
So free cash flow would be 210.80 million.