Question

Free Cash Flows Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars) 2016 2015 Sales $6,900.0 $6,000.0 Operating costs excluding depreciation 5,175.0 5,100.0 Depreciation and amortization 151.0 126.0     Earnings before interest and taxes $1,574.0 $774.0 Less Interest 148.0 129.0     Pre-tax income $1,426.0 $645.0 Taxes (40%) 570.4 258.0 Net income available to common stockholders $855.6 $387.0 Common dividends $770.0 $310.0 Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars) 2016 2015 Assets Cash $72.0 $60.0 Short-term investments 35.0 30.0 Accounts receivable 1,050.0 840.0 Inventories 1,518.0 1,380.0     Total current assets $2,675.0 $2,310.0 Net plant and equipment 1,512.0 1,260.0 Total assets $4,187.0 $3,570.0 Liabilities and Equity Accounts payable $414.0 $360.0 Accruals 621.0 540.0 Notes payable 138.0 120.0     Total current liabilities $1,173.0 $1,020.0 Long-term debt 1,380.0 1,200.0     Total liabilities $2,553.0 $2,220.0 Common stock 1,432.4 1,234.0 Retained earnings 201.6 116.0     Total common equity $1,634.0 $1,350.0 Total liabilities and equity $4,187.0 $3,570.0 Using Rhodes Corporation's financial statements (shown above), answer the following questions. 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 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 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 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 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. 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

All financials are in $ million.

Part (a)

NOPAT for 2016 = EBIT x (1 - T) = $1,574.00 x (1 - 40%) = $ 944.4 million

Part (b)

NOWC =  (Cash + Accounts Receivable + Inventories) – (Account Payable + Accruals)

NOWC for 2016 = ($72.00 +1,050.00 +1,518.00) - ($414.00 + 621) = $ 1,605.0

NOWC for 2015 = ($60.00 + 840 +1,380.00) - (360 + 540) = $2,280.00 - $900.00 = $ 1,380.0

Part (c)

Total Net Operating Capital (TNOC) = NOWC + Net fixed assets.

Hence, TNOC for 2016 = 1,605 (NOWC calculated above) + 1,512 = $ 3,117.0

Hence, TNOC for 2015 = 1,380 (NOWC calculated above) + 1,260.00 = $ 2,640.0

Part (d)

FCF = NOPAT - Change in TNOC = 944.4 - (3,117 - 2,640) = 467.4

Part (e)

ROIC = NOPAT / TNOC = 944.4 / 3,117 = 30.30%

Part (f)

Please see the table below. Please be guided by the last column titled “How it has been calculated?” to understand the mathematics. The second last column is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $ million.

Parameter	$ million	How it has been calculated?
After-tax interest payment	88.8	=1,574 x (1 - 40%)
Reduction (increase) in debt	(198.0)	=(1,200 + 120 - 1,380 - 138)
Payment of dividends	770.0	Given in Income statement, last line
Repurchase (Issue) stock	(198.4)	=1,234-1,432.4
Purchase (Sale) of short-term investments	5.0	=35 - 30