TCM Petroleum is an integrated oil company headquartered in Fort Worth, Texas. The following are the information on its income statements for 2007 and 2008 (all dollar figures are in millions):
2007
Sales: $12,200.00, cost of goods sold: 72% of sales, depreciation: $850.00, additional CAPEX: $900.00, additional investment in net working capital: $150.00
2008
Sales: $14,500.00, cost of goods sold: 78% of sales, depreciation: $970.00, additional CAPEX: $1,200.00, additional investment in net working capital: $200.00
Applicable tax rate for the company is 38%.
a. Calculate TCM’s free cash flows (FCF) for 2007 and 2008
b. Estimate TCM’s FCF for 2009-2013 using the following assumptions: Company’s sales will grow at 15% per year over the next five years, cost of goods sold is expected to increase by 2% each year from its 2008 level, CAPEX is expected to be additional 10% of additional sales per year, additional net working capital per year will be equal to 5% of additional sales, depreciation expenses will equal to the prior year total plus 10% additional CAPEX of each year. Since TCM is a going concern we need not be concerned about the liquidation value of the firm’s assets at the end of 2013.
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