Question

Madura Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: · EBIT is projected to equal $960 million. · Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. · The tax rate is 40%. · There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. What increase in net operating working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Answer 1

Answer:

$156 million

Explanation:

The computation of the change in net working capital  is shown below:

Free cash flow = EBIT × (1 -Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - net capital Expenditure.

$180 million = $960 million × (1 - 40%) + $120 million - change in working capital - $360 million

$180 million = $576 million + $120 million - change in working capital - $360 million

$180 million = $336 million - change in working capital

So, the change in working capital would be

= $336 million - $180 million

= $156 million