Financial Modeling
Bridge operating profit to free cash flow
Why can two companies with identical operating profit generate very different cash flows?
Start with operating profit after assumed tax. Add noncash depreciation and deduct investment in equipment and working capital.
FCFF = EBIT × (1 − tax rate) + depreciation − capex − increase in operating working capital
$40m × 75% = $30m after operating tax. $30m + $6m − $12m − $4m = $20m.
EBIT is $40m and assumed tax is 25%. Add $6m depreciation, subtract $12m capex and $4m more working capital. FCFF is $20m.
$40m × 75% = $30m after operating tax. $30m + $6m − $12m − $4m = $20m.
If inventory liquidation decreases operating working capital by $3m instead, what is FCFF?