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FinanceQ&A LibraryDoPharm 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.Question

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.

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:

Step 2

Free cash flow can be calculated using the below equation:

...

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