Question #8
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 6
Status: Correct
Correct Answer: C
Question
Given the following figures, calculate the FCFF. Assume the earnings and expenses are normalized and that capital expenditures will cover depreciation plus 3 percent of the firm's incremental revenues. Current Revenues $30,000,000 Revenue growth 6% Gross profit margin 20% Depreciation expense as a percent of sales 1% Working capital as a percent of sales 15% SG&A expenses $3,800,000 Tax rate 30%
Answer Choices:
A. $927,400
B. $1,245,400
C. $1,785,400
Explanation
The answer is calculated as follows:
Pro forma Income
Statement
Revenues
$31,800,000
Cost of Goods Sold
$25,440,000
Gross Profit
$6,360,000
SG&A Expenses
$3,800,000
Pro forma EBITDA
$2,560,000
Depreciation and
amortization
$318,000
Pro forma EBIT
$2,242,000
Pro forma taxes on EBIT
$672,600
Operating income after tax
$1,569,400
Adjustments to obtain FCFF
Plus: Depreciation and
amortization
$318,000
Minus: Capital expenditures
$372,000
Minus: Increase in working
capital
$270,000
FCFF
$1,245,400
The following provides a line by line explanation for the above calculations.
Pro forma Income
Statement
Explanation
Revenues
Current revenues times the growth rate:
$30,000,000 × (1.06)
Cost of Goods Sold
Revenues times one minus the gross profit margin:
$31,800,000 × (1 − 0.20)
Gross Profit
Revenues times the gross profit margin: $31,800,000
× 0.20
SG&A Expenses
Given in the question
Pro forma EBITDA
Gross Profit minus SG&A expenses: $6,360,000 −
$3,800,000
Depreciation and
amortization
Revenues times the given depreciation expense:
$31,800,000 × 0.01
Pro forma EBIT
EBITDA minus depreciation and amortization:
$2,560,000 − $318,000
Pro forma taxes on EBIT
EBIT times tax rate: $2,242,000 × 0.30
Operating income after tax
EBIT minus taxes: $2,242,000 − $672,600
Adjustments to obtain FCFF
Plus: Depreciation and
amort.
Add back noncash charges from above
Minus: Capital expenditures
Expenditures cover depreciation and increase with
revenues: $318,000 + (0.03 × $31,800,000 −
$30,000,000)
Minus: Increase in working
capital
The working capital will increase as revenues
increase: (0.15 × $31,800,000 − $30,000,000)
FCFF
Operating income net of the adjustments above