Question

Problem 2-12
Free Cash Flows

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

	2016		2015
Sales	$5,625.0		$4,500.0
Operating costs excluding depreciation	4,781.0		3,825.0
Depreciation and amortization	135.0		117.0
Earnings before interest and taxes	$709.0		$558.0
Less Interest	121.0		97.0
Pre-tax income	$588.0		$461.0
Taxes (40%)	235.2		184.4
Net income available to common stockholders	$352.8		$276.6
Common dividends	$318.0		$221.0

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

	2016		2015
Assets
Cash	$70.0		$54.0
Short-term investments	29.0		23.0
Accounts receivable	569.0		495.0
Inventories	1,139.0		990.0
Total current assets	$1,807.0		$1,562.0
Net plant and equipment	1,346.0		1,170.0
Total assets	$3,153.0		$2,732.0
Liabilities and Equity
Accounts payable	$338.0		$270.0
Accruals	347.0		315.0
Notes payable	113.0		90.0
Total current liabilities	$798.0		$675.0
Long-term debt	1,125.0		900.0
Total liabilities	$1,923.0		$1,575.0
Common stock	1,112.2		1,074.0
Retained earnings	117.8		83.0
Total common equity	$1,230.0		$1,157.0
Total liabilities and equity	$3,153.0		$2,732.0

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

a.  net operating profit after taxes (NOPAT) = operating income or earnings before interest & taxes(EBIT)*(1 - tax rate)

NOPAT for 2016 = $709*(1 - 0.40) = $709*0.60 = $425.4 million

NOPAT for 2016 is $425.4 million.

b. net operating working capital = current operating assets - current operating liabilities

Current operating assets = Cash+accounts receivable+inventories

Current operating liabilities = accounts payable+accrual+notes payable

  net operating working capital for 2015 = ($54+$495+$990) - ($270+$315+$90) = $1,539 - $675 = $864 million

  net operating working capital for 2016 = ($70+$569+$1139) - ($338+$347+$113) = $1,778 - $798 = $980 million

c. total net operating capital = net operating working capital + net plant and equipment

net operating working capital have been calculated in part b.

  total net operating capital for 2015 = $864 + $1,170 = $2,034 million

total net operating capital for 2016 = $980 + $1,346 = $2,326 million

d. free cash flow = net income + non-cash expenses - increase in working capital - capital expenditures

We have Depreciation and amortization as non-cash expenses in this question.

increase in working capital = (accounts receivable 2016 - accounts receivable 2015) + (inventory 2016 - inventory 2015) - (accounts payable 2016 - accounts payable 2015)

increase in working capital = ($569 - $495) + ($1,139 - $990) - ($338 - $270) = $74+$149-$68 = $155

Capital expenditures = (net plant and equipment 2016 - net plant and equipment 2015 + Depreciation and amortization 2016)

= ($1,346 - $1,170 + 135) = $311

Free cash flow for 2016 = $352.8 + $135 - $155 - $311 = $21.8 million