Question

The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm

Answer 1

Answer:

A. $405.6million

Explanation:

Recall that

FCFE = FCF - expenses(1 - t) + net debt

Where

FCF = 405

Expenses = 76

t =0.35 or 35%

Net debt = 50

Thus,

FCFE = 405 - 76(1 - .35) + 50

= 405 - 76(0.65) + 50

= 405 - 49.4 + 50

= 355.6 + 50

= 405.6

Therefore, free cash flow to equity holders is $405.6 million

Answer 2

Answer:

$405.6million

Explanation:

FCFE= FCF - expenses(1 - t) + net debt

The values given are:

FCF= $405 million

Expenses= $76million

t= 35%, 35×100= 0.35

t= 0.35

Net debt= 50

Therefore,

FCFE= 405 - 76(1 - 0.35) + 50

= 405 - 76(0.65) + 50

= 405 - 49.4 + 50

= 405.6

Thus, the free cash flow to the equity holders of the firm is $405.6 million