Alpha Manufacturing has the following financial information for the current year and projected for next year.Calculate its projected free cash flow to equity. $$\begin{array} { l r r }
&\text { Current } \
& { \text { year } } & \text { Projected } \
\text { EBIT } & \$ 1,500 & \$ 1,800 \
\text { Operating assets } & \$ 3,000 & \$ 3,400 \
\text { Operating liabilities } & \$ 200 & \$ 220 \
\text { Total debt } & \$ 1,500 & \$ 1,800 \
\text { Interest rate on debt } & 6 \% & 6 \% \
\text { Tax rate } & 25 \% & 25 \%
\end{array}$$

Question

Alpha Manufacturing has the following financial information for the current year and projected for next year.Calculate its projected free cash flow to equity. $$\begin{array} { l r r } 
&\text { Current } \
& { \text { year } } & \text { Projected } \
\text { EBIT } & \$ 1,500 & \$ 1,800 \
\text { Operating assets } & \$ 3,000 & \$ 3,400 \
\text { Operating liabilities } & \$ 200 & \$ 220 \
\text { Total debt } & \$ 1,500 & \$ 1,800 \
\text { Interest rate on debt } & 6 \% & 6 \% \
\text { Tax rate } & 25 \% & 25 \%
\end{array}$$

Quizplus · Accepted Answer

To calculate the projected Free Cash Flow to Equity (FCFE), we follow these steps:1. Calculate Net Income:   - EBIT = $1,800   - Interest = Total debt * Interest rate = $1,800 * 6% = $108   - EBT (Earnings Before Taxes) = EBIT - Interest = $1,800 - $108 = $1,692   - Taxes = EBT * Tax rate = $1,692 * 25% = $423   - Net Income = EBT - Taxes = $1,692 - $423 = $1,2692. Calculate Net Borrowing:   - Net Borrowing = Ending Total Debt - Beginning Total Debt = $1,800 - $1,500 = $3003. Calculate Change in Net Operating Working Capital (NOWC):   - NOWC = (Operating Assets - Operating Liabilities)   - Change in NOWC = (Ending NOWC - Beginning NOWC) = (($3,400 - $220) - ($3,000 - $200)) = $3,180 - $2,800 = $3804. Calculate Capital Expenditure (CapEx):   - Since there's no direct information on CapEx, we infer it from the change in operating assets.   - Change in Operating Assets = Ending Operating Assets - Beginning Operating Assets = $3,400 - $3,000 = $4005. Calculate FCFE:   - FCFE = Net Income + Net Borrowing - Change in NOWC - CapEx   - FCFE = $1,269 + $300 - $380 - $400 = $1,189Therefore, the projected Free Cash Flow to Equity (FCFE) is $1,189.

Alpha Manufacturing Has the Following Financial Information for the Current