Free cash flow
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TCM Petroleum is an integrated oil company headquartered in Fort Worth, Texas. Income statements for 2005 and 2006 are found below ($ millions):(see the attached spreadsheet)
In 2005 TCM made capital expenditures of $875 million followed by $1,322 million in 2006. TCM also invested an additional $102 million in net working capital in 2005, followed by a decrease in its investment in net working capital of $430 million in 2006.
a. Calculate TCM's PFCF for 2005 and 2006. TCM's tax rate is 40%.
b. Estimate TCM's PFCF for 2007-2011 using the following assumptions:
Operating income continues to grow at 10% per year over the next five years, CAPEX is expected to be $1,000 million per year, new investments in net working capital are expected to be $100 million per year, and depreciation expense equals the prior year total plus 10% of the prior year's CAPEX. Note that since TCM is a going concern we need not be concern about the liquidation value of the firm's assets at the end of 2011.
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Solution Summary
Response provides the steps to compute the free cash flow
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a) Calculate TCM PFCF for 2005 and 2006. TCM's tax rate is 40%
For the year 2005
Free cash flow= After tax operating income+Depreciation expense-Increase in Working capital - Capital expenditure
=(958-340.8)+794-875-102
$434.20 mn
For the year 2006
Free cash ...
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