Continuing her work, Espinosa decides to forecast FCFF for the next five years. She is concerned that Pitts Corporation will not be able to maintain its historical EBIT margin and that the EBIT margin will decline from the current 16.67 percent to 14.5 percent in the next five years. Exhibit 12 summarizes her forecasts.

Transcribed Image Text:

EXHIBIT 12 Free Cash Flow Growth for Pitts Corporation (Dollars in Millions) Year 1 Year 2 Year 3 Year 4 Year 5 Sales growth 10.00% 10.00% 10.00% 10.00% 10.00% EBIT margin 16.67% 16.00% 15.50% 15.00% 14.50% Tax rate 40.00% 40.00% 40.00% 40.00% 40.00% Incremental FC investment 33.33% 33.33% 33.33% 33.33% 33.33% Incremental WC investment 15.00% 15.00% 15.00% 15.00% 15.00% Prior-year sales $3,000.00 Sales forecast $3,300.00 $3,630.00 $3,993.00 $4,392.30 $4,831.53 EBIT forecast 550.00 580.80 618.92 658.85 700.57 EBIT(1 - Tax rate) 330.00 348.48 371.35 395.31 420.34 Incremental FC (100.00) (110.00) (121.00) (133.10) (146.41) Incremental WC (45.00) (49.50) (54.45) (59.90) (65.88) FCFF $185.00 $188.98 $195.90 $202.31 $208.05