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

1.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.

2.What is the ROIC for 2016? Round your answer to two decimal places.

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.

3.Reduction (increase) in debt

Answer 1

1). FCF = NOPAT - Net investment in operating capital

NOPAT = EBIT*(1-Tax rate) = 2,077*(1-40%) = 1,246.2

Net investment in operating capital = Total operating capital in 2016 - Total operating capital in 2015

Total operating capital (TOC) = Net operating working capital (NOWC) + net fixed assets (NFA)

NOWC calculations:

	2016	2015
Cash	108.0	98.0
A/C receivable	1,350.0	1,125.0
Inventory	2,145.0	1,650.0
Operating assets	3,603.0	2,873.0
A/C payable	878.0	675.0
Accruals	293.0	225.0
Operating liabilities	1,171.0	900.0
NOWC	2,432.0	1,973.0

2016 TOC = 2,432 + 1,725 = 4,157

2015 TOC = 1,973 + 1,500 = 3,473

Net investment in operating capital = 4,157 - 3,473 = 684

FCF in 2016 = 1,246.2 - 684 = 562.2

2). 2016 ROIC = NOPAT/TOC = 1,246.2/4,157 = 29.98%

3).

Interest payment*(1-Tax rate)	After-tax interest payment	115.8
(LT debt + notes payable) in 2015 - (LT debt + notes payable) in 2016	Reduction (increase) in debt	(330.0)
2016 payment of dividends	Payment of dividends	1,017.0
2015 common stock - 2016 common stock	Repurchase (issue) stock	(248.6)
2016 S-T investments - 2015 S-T investments	Purchase (sale) of short-term investments	8.0
Sum of all line items above	FCF	562.2

As a cross-check, this FCF matches with the FCF calculated in part (1).