Exercise 3:

FCFE =
Warner-Lambert

Net Income - (Capital Exp - Depreciation)*(1-Debt Ratio)-(Change in Working Capital)*(1-DR)

in millions

FCFE

Substract
Substract

IBM
Substract
Substract

Net Income
(Cap. Exp- Depreciation)*(1-DR)
(Change in Working Capital)*(1-DR)
FCFE

Debt Ratio = 0%
1994
695
182
22
491

in millions
Net Income
(Cap. Exp- Depreciation)*(1-DR)
(Change in Working Capital)*(1-DR)
FCFE

Debt Ratio = 50%

1992
1,417
-229.5
750
897

Working Capital)*(1-DR)

Debt Ratio = 0%
1995
765
200
23.83
541.17
Debt Ratio = 50%
1993
1,130
-925
1000
1,055

Debt Ratio = 14%

1994
1995
695
765
156.52
172
18.92
20.5
519.56
572.5

Debt Ratio = 40%

1994
1995
695
765
109.2
120
13.2
14.3
572.6
630.7

Debt Ratio = 80%

1994
1995
695
765
36.4
40
4.4
4.766
654.2
720.234

Free Cash Flow to the Firm

Managerial Accounting
Exercise 4

1- (In Billion)
Revenue
EBIT
Capital Expenditure
Depreciation
Working Capital
Increase in working Capital

2004
7

2005

1.5
0.66
0.55
5%
0.15
11.42%
36%
5%

1.8

FCFF= EBIT(1-tax rate)+DepriciationCapital Expenditure - #Working capital

0.70

0.74

Value of the firm = FCFF1/(WACC-g)

11.45

Weighted Average Cost of Capital

Marginal tax rate

FCFF expended to grow

In Millions
2- EBIT 1994
Capital Expenditure
Depreciation
Revenue
Working Capital as % of the revenue
Marginal Tax Rate
Cost of Equity during high growth phase

532
310
207
7230
25%
36%
14%

Free Cash Flow for the next 5 years

EBIT
*(1-t)
Depreciation
Capital Expenditure
Revenue
Working Capital
# in Working Capital

0
532.00
64%
207.00
310.00
7,230
1,808
0

1
574.56
64%
223.56
334.80
7,808
1,952
144.60

2
620.52
64%
241.44
361.58
8,433
2,108
156.17

3
670.17
64%
260.76
390.51
9,108
2,277
168.66

4
723.78
64%
281.62
421.75
9,836
2,459
182.15

5
781.68
64%
304.15
455.49
10,623
2,656
196.73

FCFF= EBIT(1-tax rate)+DepriciationCapital Expenditure - #Working capital

237.48

111.88

120.83

130.49

140.93

152.21

Cost of Equity in High Growth phase

Cost of Capital during high growth phase= Cost of Equity*(Debt ration)+pre -tax cost of
debt(1-t)*debt ratio

14.38%
10.23%

Estimatte the Free Cash Flow in the terminal Year

Cost of Equity in Stable Growth phase

13.0%

Cost of Capital during stable growth phase= Cost of Equity*(1-Debt ratio)+pre -tax cost of
debt(1-t)*debt ratio
Value of the Firm=FCFFterminal year/(cost of capital in stable growth phase- expected growth rate of FCFF)
Present Value of FCFF
PV of Terminal Value
Value of the firm
Value of the Debt
Value of Equity
Value per share

237.48

487.36
3,947.29
4,434.65
2,740.6
1693.52
13.40

11.11%
6,424 mill

Terminal year
820.77
64%
11,154
2,789
132.79

392.50