Hannaford Enterprises reported earnings before interest, taxes, depreciation and amortization (EBITDA) of $ 500 million in 2017. The firm had depreciation of $80 million and reported capital expenditures of $ 120 million. The book value of the invested capital was $2,000 million. The firm's total working capital increased from $80 million to $180 million, but half of this increase was due to an increase in the cash balance; the firm has no short-term debt. The firm has a tax rate of 30%. 

In addition, the firm also invests considerable amounts in research and development (R&D) each year. The R&D expenses for the current and prior 5 years are as follows: $80 million (2017), $100 million (2016), $70 million (2015), $60 million (2014), $65 million (2013), $90 million (2012).

Finally, the firm acquired another firm for $150 million during 2017 and reported amortization of $40 million for the year, which is not tax deductable. 

(a) Estimate the free cash flow to the firm (FCFF) assuming capitalising the R&D expenses. Tip: notice the impact of the capitalisation on FCFF. 

(b) Determine the return on capital (ROC) before and after capitalising the R&D expenses, assuming 5 years of amortisable life.

Answer rating: 100% (QA)

nswer 1 lultin f Free sh Flws t Firm EBITD 500 millin Dereitin 80 millin EBIT EBIT... View the full answer