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25 December, 01:57

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

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  1. 25 December, 02:23
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    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
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