Free Cash Flow to Firm

EXERCISE 01

Walkers is an all-equity stationary firm worth €2,400. Its required return is 7.5%, and there are no taxes.

A.Find annual free cash flow.

A.

V=\frac{FCF}{r}\quad\Rightarrow\quad FCF=Vr

FCF=2{,}400(0.075)

€180 per year.

Free Cash Flow to Firm

EXERCISE 02

BMK has perpetual annual sales €8,000, cash operating costs equal to 50% of sales, depreciation €1,000 and total annual reinvestment including NWC €1,000. Corporate tax is 30%, WACC 20%, debt/value 40%, and debt cost 5%.

A.Calculate operating free cash flow and firm value.

A.

FCF=EBIT(1-T_c)+Dep-Capex-\Delta NWC

EBIT=8{,}000-4{,}000-1{,}000=3{,}000

FCF=3{,}000(0.70)+1{,}000-1{,}000=2{,}100

V_L=\frac{2{,}100}{0.20}

€10,500.