Question

Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars)

	2016		2015
Sales	$9,000.0		$7,500.0
Operating costs excluding depreciation	6,750.0		6,375.0
Depreciation and amortization	173.0		150.0
Earnings before interest and taxes	$2,077.0		$975.0
Less Interest	193.0		161.0
Pre-tax income	$1,884.0		$814.0
Taxes (40%)	753.6		325.6
Net income available to common stockholders	$1,130.4		$488.4
Common dividends	$1,017.0		$391.0

Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)

	2016		2015
Assets
Cash	$108.0		$98.0
Short-term investments	46.0		38.0
Accounts receivable	1,350.0		1,125.0
Inventories	2,145.0		1,650.0
Total current assets	$3,649.0		$2,911.0
Net plant and equipment	1,725.0		1,500.0
Total assets	$5,374.0		$4,411.0
Liabilities and Equity
Accounts payable	$878.0		$675.0
Accruals	293.0		225.0
Notes payable	180.0		150.0
Total current liabilities	$1,351.0		$1,050.0
Long-term debt	1,800.0		1,500.0
Total liabilities	$3,151.0		$2,550.0
Common stock	1,963.6		1,715.0
Retained earnings	259.4		146.0
Total common equity	$2,223.0		$1,861.0
Total liabilities and equity	$5,374.0		$4,411.0

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $    million
   
2. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $    million
   2015 $    million
   
3. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $    million
   2015 $    million
   
4. What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $    million
   
5. What is the ROIC for 2016? Round your answer to two decimal places.
     %
   
6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   After-tax interest payment	$    million
   Reduction (increase) in debt	$    million
   Payment of dividends	$    million
   Repurchase (Issue) stock	$    million
   Purchase (Sale) of short-term investments	$    million

Answer 1

Solution:

a. NOPAT = EBIT (1 - tax rate)

NOPAT = $2,077 (1 - 0.40)

NOPAT = $1,246.2 million

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b. Net operating working capital for 2016 = Operating current asset for 2016 - operating current liabilities for 2016

Net operating working capital for 2016 = (Cash + Accounts Receivables + Inventories) - (Accounts payable + Accruals)

Net operating working capital for 2016 = ($108 + $1,350 + $2,145) - ($878 + $293)

Net operating working capital for 2016 = $3,603 - $1,171

Net operating working capital for 2016 = $2,432

Net operating working capital for 2015 = Operating current asset for 2015 - operating current liabilities for 2015

Net operating working capital for 2015 = (Cash + Accounts Receivables + Inventories) - (Accounts payable + Accruals)

Net operating working capital for 2015 = ($98 + $1,125 + $1,650) - ($675 + $225)

Net operating working capital for 2015 = $2,873 - $900

Net operating working capital for 2015 = $1,973

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c. Operating capital for 2016 = Net operating working capital for 2016 + Net fixed assets

Operating capital for 2016 = $2,432 + $1,725

Operating capital for 2016 = $4,157

Operating capital for 2015 = Net operating working capital for 2015 + Net fixed assets

Operating capital for 2015 = $1,973 + $1,500

Operating capital for 2015 = $3,473

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d. Net investment in operating capital = Operating capital for 2016 - Operating capital for 2015

Net investment in operating capital = $4,157 - $3,473

Net investment in operating capital = $684

Free cash flow for 2016 = NOPAT - Net investment in operating capital

Free cash flow for 2016 = $1,246.2 - $684

Free cash flow for 2016 = $562.2