The answer is calculated as follows:
| Pro forma Income Statement |
|
| Revenues |
$31,800,000 |
| Cost of Goods Sold |
$25,440,000 |
| Gross Profit |
$6,360,000 |
| SG&A Expenses |
$3,800,000 |
| Pro forma EBITDA |
$2,560,000 |
| Depreciation and amortization |
$318,000 |
| Pro forma EBIT |
$2,242,000 |
| Pro forma taxes on EBIT |
$672,600 |
| Operating income after tax |
$1,569,400 |
| |
|
| Adjustments to obtain FCFF |
|
| Plus: Depreciation and amortization |
$318,000 |
| Minus: Capital expenditures |
$372,000 |
| Minus: Increase in working capital |
$270,000 |
| FCFF |
$1,245,400 |
The following provides a line by line explanation for the above calculations.
| Pro forma Income Statement |
Explanation |
| Revenues |
Current revenues times the growth rate: $30,000,000 × (1.06) |
| Cost of Goods Sold |
Revenues times one minus the gross profit margin: $31,800,000 × (1 − 0.20) |
| Gross Profit |
Revenues times the gross profit margin: $31,800,000 × 0.20 |
| SG&A Expenses |
Given in the question |
| Pro forma EBITDA |
Gross Profit minus SG&A expenses: $6,360,000 − $3,800,000 |
| Depreciation and amortization |
Revenues times the given depreciation expense: $31,800,000 × 0.01 |
| Pro forma EBIT |
EBITDA minus depreciation and amortization: $2,560,000 − $318,000 |
| Pro forma taxes on EBIT |
EBIT times tax rate: $2,242,000 × 0.30 |
| Operating income after tax |
EBIT minus taxes: $2,242,000 − $672,600 |
| |
|
| Adjustments to obtain FCFF |
|
| Plus: Depreciation and amort. |
Add back noncash charges from above |
| Minus: Capital expenditures |
Expenditures cover depreciation and increase with revenues: $318,000 + (0.03 × $31,800,000 − $30,000,000) |
| Minus: Increase in working capital |
The working capital will increase as revenues increase: (0.15 × $31,800,000 − $30,000,000) |
| FCFF |
Operating income net of the adjustments above |
|
