Calculate A. Modify EBIT for cash flow purposes to equal pretax income + interest expense. Then set
Question:
Calculate
A. Modify EBIT for cash flow purposes to equal pretax income + interest expense. Then set operating cash flow equal to modified EBIT – unlevered taxes + depreciation & amortization.
a. Set unlevered taxes at income tax expense + corporate tax rate * interest expense.
b. Assume a 38% corporate tax rate.
B. Notice that the “working capital adjustments” are the opposite of the change in NWC and that “capital expenditures” are the opposite of capital expenditures—the signs on those numbers indicate the impact they should have on free cash flows.
C. For years after 2011, assume a 2% terminal growth rate in interest expense, pretax income, and depreciation
& amortization.
a. Set income tax expense for 2012 and beyond, however, at pretax income * corporate tax rate
b. Assume that for 2012 and onward, capital expenditure is 2% higher than the same year’s
depreciation and amortization.
c. Set the 2012 working capital adjustment at -10 with subsequent adjustments rising at 2%.
Financial Reporting Financial Statement Analysis and Valuation
ISBN: 978-0324302950
6th edition
Authors: Clyde P. Stickney