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Free Cash Flow

I am posted these as they rely on each other and the credits have been increased accordingly. Please show all work, thanks

1. Forecast the Free Cash Flow for the next three FY under the assumption that sales will increase by 5% a year and that Staples will maintain all current ratios (depreciations in FY ending on January 31st, 2004 are $282. 811m);

2. The 30-years gov't bond rate is 5 %; please compute the cost of equity;

3. Under the assumption that Staples maintains the current capital structure, and that at the current debt/equity ratio Staples can borrow at 6%, compute the cost of capital for Staples (current share price is $28.73);

4. Compute the terminal value, under the assumption that the FCF will grow at 2% per year afterward;

5. Determine the current value of Staples' assets. What is the value of Staples' equity?

By using the information reported in Yahoo for the Staples, at

http://finance.yahoo.com/q/is?s=SPLS&annual
http://finance.yahoo.com/q/bs?s=SPLS&annual
http://finance.yahoo.com/q/ks?s=SPLS

Please show all work

Solution Preview

1. Forecast the Free Cash Flow for the next three FY under the assumption that sales will increase by 5% a year and that Staples will maintain all current ratios (depreciations in FY ending on January 31st, 2004 are $282. 811m);

Please refer to the EXCEL for calculation:
Note:
All the numbers are in THOUSANDS!
Free cash flow represents the cash that is available for a company to spend after financing its capital projects.
Free cash flow = net income + depreciation - capital expenditures.
Where NI and Depreciation both increase at the same rate 5% as Sales.
Capital expenditure = CHANGE in "Property Plant and Equipment", while "Property Plant and Equipment" is growing at the rate 5%
31-Jan-04 31-Jan-05 31-Jan-06 31-Jan-07
Sales 13,181,222 13,840,283 14,532,297 15,258,912
Net Income 490,211 514,722 540,458 567,481
Depreciation 282,811 296,952 311,799 327,389
Property Plant and Equipment 1,505,301 1,580,566 1,659,594 1,742,574
Capital expenditure 75,265 79,028 82,980
Free cash flow 736,408 773,228 811,890

2. The 30-years gov't bond rate is 5 %; please compute the cost of equity;

The return that stockholders require for a company. The formula is the dividend ...

$2.19