How Is FCFF Calculated for 2022?

[Cwik]

Hello everybody,

We've been discussing FCFF recently during one of the classes, however during my at-home preparations I came across following exercise:

Sales revenues of a company at the end of 2017 amounted to USD 99 560 ths, and EBIT margin was 6.8%. The revenue growth is expected to fall linearly from 13.6% in 2018 to the inflation target increased by 0.5 pp. in 2022 contrary to EBIT margin which should rise linearly to reach in the residual period level of 9.8%, estimate FCFF in the residual period.

For the purposes of the calculation, assume that the amount of capital expenditure equals amortization. The net working capital increase should amount to 5% nominal y-o-y revenue growth. The forecast period preceding the residual period should be 5 years. Use the long-term inflation target as the rate of sustained growth.

Data as of 31.12.2017

Free-risk rate 5.5%
Inflation 2.3%
Long-term inflation target of the National Bank 2.5%
Effective tax rate 19.0%
Cost of debt 8.1%
Share price 22.34
Number of shares 3 698 246
Debt/Equity (sector) 0.56
Discount for lack of liquidity 13.0%
Control premium 25.0%
Balance sheet as at 31.12.2017 USD k
Intangible assets 1 624
Tangible fixed assets in use 32 734
Long-term investments 12 459
Long-term receivables 9 252
Fixed assets 56 069
Inventory 24 964
Short term receivables 16 894
Cash and cash equivalents 4 086
Current assets 45 944
Total assets 102 013
Share capital 43 689
Supplementary capital 5 625
Previous years profit (loss) 4 560
Net profit (loss) 1 560
Equity 55 434
Credits and loans 14 452
Debt securities 8 250
Other 1 246
Long-term liabilities 23 948
Trade liabilities, maturing: 18 925
Payroll liabilities 2 456
Other financial liabilities 1 250
Short-term liabilities 22 631
Total liabilities 102 013

The answers are:
USD 14 670 ths
USD 12 217 ths
USD 11 848 ths
USD 15 040 ths So, just to repeat I am being asked to calculate the FCFF in year 2022. Honestly, I don't even know how to approach the exercise. My only thoughts on this are:
Revenue growth should amount to 3% in 2022?
EBIT margin in 2022 should be 9,8%

Does anyone have advice how to proceed? Thank you in advance.

 

[jvicens]

Hello,

Thank you for sharing this exercise with us. To calculate the FCFF in year 2022, we will need to use the formula:

FCFF = EBIT - Taxes + Depreciation & Amortization - Change in Working Capital - Capital Expenditures

First, we can calculate the EBIT for 2022 using the linear growth rate provided in the exercise. We know that the EBIT margin is expected to rise linearly to reach 9.8% in the residual period. So, we can calculate the EBIT for 2022 using the following formula:

EBIT = Sales Revenue x EBIT Margin = USD 99,560,000 x 9.8% = USD 9,747,280

Next, we need to calculate the taxes, which can be done using the effective tax rate provided in the exercise. So, the taxes for 2022 will be:

Taxes = EBIT x Effective Tax Rate = USD 9,747,280 x 19% = USD 1,852,983.20

Then, we can calculate the depreciation and amortization using the information provided in the exercise. We are told that the capital expenditure equals amortization, so we can use the amortization amount from the balance sheet for 2022, which is USD 14,452,000.

Now, we need to calculate the change in working capital. We are given that the net working capital increase should amount to 5% of the nominal year-on-year revenue growth. So, we can calculate the change in working capital as follows:

Change in Working Capital = 5% x Nominal Year-on-Year Revenue Growth = 5% x 3% = 0.15%

Finally, we can calculate the capital expenditures for 2022 using the information provided in the exercise. We are given that the amount of capital expenditure equals amortization, which we have already calculated as USD 14,452,000.

Putting all of this together, we get:

FCFF = USD 9,747,280 - USD 1,852,983.20 + USD 14,452,000 - 0.15% - USD 14,452,000 = USD 14,669,296.80

Therefore, the FCFF in 2022 is USD 14,669,296.80.

I hope this helps. Please let me know if you have any further questions or need