DoPharm is evaluating a takeover of Phaneuf Accelerator Inc. by using the FCF and FCFE valuation approaches. DoPharm has collected the following information for the current year:• Phaneuf has sales of $1,000 million with 40% operating margin, depreciation of $90 million, capital expenditures of $170 million, and an increase in working capital of $40 million.• Interest expenses are $50 million. The current market value of Phaneuf’s outstanding debt is $1,500 million. The company has retired the existing bonds for $10 million.• FCF and FCFE are expected to grow at 10% for the next five years and 6% after that.• The tax rate is 30%.• Phaneuf financed with 40% debt and 60% equity. Its before-tax cost of debt is 9%, and its cost of equity is 13%. The number of shares outstanding is 100 million.Question: Estimate the current year’s free cash flow of Phaneuf in millions.

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Asked Jan 30, 2020
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DoPharm is evaluating a takeover of Phaneuf Accelerator Inc. by using the FCF and FCFE valuation approaches. DoPharm has collected the following information for the current year:
• Phaneuf has sales of $1,000 million with 40% operating margin, depreciation of $90 million, capital expenditures of $170 million, and an increase in working capital of $40 million.
• Interest expenses are $50 million. The current market value of Phaneuf’s outstanding debt is $1,500 million. The company has retired the existing bonds for $10 million.
• FCF and FCFE are expected to grow at 10% for the next five years and 6% after that.
• The tax rate is 30%.
• Phaneuf financed with 40% debt and 60% equity. Its before-tax cost of debt is 9%, and its cost of equity is 13%. The number of shares outstanding is 100 million.


Question: Estimate the current year’s free cash flow of Phaneuf in millions.

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Expert Answer

Step 1

Free cash flow of the firm is its cash flow from operations minus capital expenditures.

Operating income or EBIT can be calculated as below:

Finance homework question answer, step 1, image 1

Step 2

Free cash flow can be calculated using the below equation:

 

Finance homework question answer, step 2, image 1

...

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