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Free cash flow

Please see and use the attached spreadsheet! Thank you!

TCM Petroleum is an integrated oil company headquartered in Fort Worth, Texas. Income statements for 2005 and 2006 are found below ($ millions):(see the attached spreadsheet)

In 2005 TCM made capital expenditures of $875 million followed by $1,322 million in 2006. TCM also invested an additional $102 million in net working capital in 2005, followed by a decrease in its investment in net working capital of $430 million in 2006.

a. Calculate TCM's PFCF for 2005 and 2006. TCM's tax rate is 40%.
b. Estimate TCM's PFCF for 2007-2011 using the following assumptions:
Operating income continues to grow at 10% per year over the next five years, CAPEX is expected to be $1,000 million per year, new investments in net working capital are expected to be $100 million per year, and depreciation expense equals the prior year total plus 10% of the prior year's CAPEX. Note that since TCM is a going concern we need not be concern about the liquidation value of the firm's assets at the end of 2011.

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Solution Preview

a) Calculate TCM PFCF for 2005 and 2006. TCM's tax rate is 40%

For the year 2005
Free cash flow= After tax operating income+Depreciation expense-Increase in Working capital - Capital expenditure
$434.20 mn

For the year 2006
Free cash ...

Solution Summary

Response provides the steps to compute the free cash flow