Problem 1: TCM Petroleum is an integrated oil company headquartered in Fort Worth, Texas. Income statements for 2005 and 2006 are found below ($ millions):
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Dec. 06 |
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Dec. 05 |
| Sales |
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$13,358.00 |
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$12,211.00 |
| Cost of goods sold |
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(10,591.00) |
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(9,755.00) |
| Gross Profit |
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2,777.00 |
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2,456.00 |
| Selling, general, & administrative expense |
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(698.00) |
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(704.00) |
| Operating income before depreciation |
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2,079.00 |
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1,752.00 |
| Depreciation, depletion, and amortization |
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(871.00) |
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(794.00) |
| Operating profit |
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1,208.00 |
|
958.00 |
| Interest expense |
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(295.00) |
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(265.00) |
| Nonoperating income or expense |
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151.00 |
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139.00 |
| Special items |
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20.00 |
| Pretax income |
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1,064.00 |
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852.00 |
| Total income before taxes |
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(425.60) |
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340.80 |
| Total income before taxes |
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$ 638.40 |
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$ 511.20 |
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.
Q1. Calculate TCM's PFCF for 2005 and 2006. TCM's tax rate is 40%.
Q2. 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.