Free Cash Flow Forecasts

Free Cash Flow Forecasts

Suppose we have a new venture that has already raised some debt and equity capital. A portion of their opening balance sheet is as follows. This includes only the operating assets and liabilities. Note that no information is provided about the amount of or types of debt vs equity claims. Obviously, in a complete balance sheet these would all be specified and the overall balance sheet would have to balance.

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Our objective is to make financial projections for the next three years (the venture will hopefully persist beyond three years, but we won’t worry about projections beyond this time).

  1. Project out the income statement for the next three years, then the balance sheet items. Note that you can’t get a complete balance sheet.
  2. Then use these sets of statements to try to forecast the next three years of FREE CASH FLOW.

Be sure to indicate how you have defined free cash flow. Your choices for how to define it will be limited because of the limited amount of financial statement detail provided.

  1. Some definitions of Free Cash flow focus solely on CAPEX in the investing category. If you wanted to do this, you’d obviously need to separate out CAPEX from the other types of investments. What else would you have to do differently in these projections? You don’t have to do (or re-do) any calculations here, just explain in words what (if anything) you’d do differently.
  2. What advantages would there have been (if any) to forecasting out a complete set of financial statements relative to what you have here?


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