Answer:
FCFF = $335.50
Explanation:
Formula of Free Cash Flow to the firm ( FCFF) :
FCFF= Net Income+ Interest(1- tax rate)+ Depreciation+ working capital changes- capital investment
Now let us note some critical points and assumptions which are necessary to solve the question.
As the question says that the company will maintain its existing after tax return on capital invested next year, hence that means that the net income for the next year remains the same, which is $140.
It is also that the company expects it's Operating Income(EBIT) to increase by 6% every year, hence it's operating income(EBIT) for the next year will be $250*(1.06)= $265
Tax rate remains the same, that is, (60/200*100)= 30%
As there is no details with respect to working capital changes and any capital investment made, hence it is assumed to zero changes and no additional investment.
It is assumed that the depreciation method being followed is straight line method, hence depreciation value next year would be the same, that is, 150
Now let's finalise our income statement:
EBIT = $265 given in the question
Interest = ( $65) backward calculation
Taxable Income = $200
Taxes (30%) = ($60)
Net income = $140 given in question.
Hence our FCFF will be :
$
140 + $65*(1-0.30) + $150 = $335.50
