Capital Expenditures
















Note that we have assumed that revenues, net income and depreciation are expected to grow 6% a year for the next 5 years and that working capital remains at its existing percentage (1.92%) of revenues. We have also assumed that capital expenditures will grow faster (10%) over the next 5 years to compensate for reduced investment in prior years. Finally, we assumed that 30% of the net capital expenditures and working capital changes would be funded with debt, reflecting the optimal debt ratio we computed for Disney in chapter 8. Based upon these forecasts, and assuming that Disney maintains its existing dividend, Disney should have about $4.876 million in excess cash that it can return to its stockholders either as dividends or in the form of stock buybacks over the period.

Examining Aracruz, we find that the firm is paying out more in dividends than it has available in free cashflows to equity. If you couple this finding with large investment needs, potentially good project returns and superior stock price performance, is seems clear that Aracruz will gain by cutting its dividends. In fact, this conclusion is strengthened when we forecast the free cashflows to equity for the next 5 years and compare them to the dividends being paid in Table 11.11;

Table 11.11: Expected FCFE and Cash Available for Dividends
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