Question

SUBJECT is FINANCE

Free Cash Flows

Rhodes Corporation’s financial statements are shown below.

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

	2020			2019
Sales	$	13,000		$	11,000
Operating costs excluding depreciation		11,588			9,682
Depreciation and amortization		400			370
Earnings before interest and taxes	$	1,012		$	948
Less interest		240			200
Pre-tax income	$	772		$	748
Taxes (25%)		193			187
Net income available to common stockholders	$	579		$	561
Common dividends	$	202		$	200

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

	2020			2019
Assets
Cash	$	650		$	600
Short-term investments		120			100
Accounts receivable		2,750			2,500
Inventories		1,650			1,400
Total current assets	$	5,170		$	4,600
Net plant and equipment		3,750			3,500
Total assets	$	8,920		$	8,100
Liabilities and Equity
Accounts payable	$	1,300		$	1,200
Accruals		650			600
Notes payable		192			100
Total current liabilities	$	2,142		$	1,900
Long-term debt		1,300			1,200
Total liabilities	$	3,442			3,100
Common stock		3,901			3,800
Retained earnings		1,577			1,200
Total common equity	$	5,478		$	5,000
Total liabilities and equity	$	8,920		$	8,100

Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.
2. What are the amounts of net operating working capital for both years (2020 and 2019)? Enter your answers in millions. Round your answers to the nearest whole number.

   2020: $   million

   2019: $   million

3. What are the amounts of total net operating capital for both years? Enter your answers in millions.

   2020: $   million

   2019: $   million

4. What is the free cash flow for 2020? Enter your answer in millions. Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest whole number.

   $    million

5. What is the ROIC for 2020? 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 answers in millions.

   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]	NOPAT for 2020 = EBIT*(1-t) = 1012*(1-25%) =	$              759
b]	Net operating working capital = Total operating current assets-Total operating current liabilities	$          3,100	$       2,700
c]	Total net operating capital = Total NOWC+Net fixed assets =	$          6,850	$       6,200
d]	FCF=OCF-Change in Total net operating capital-Depreciation.
	OCF = NOPAT+Depreciation = 759+400 =	$          1,159
	FCF = 1159-(6850-6200)-400 =	$              109
e]	ROIC = NOPAT/Total net operating capital = 759/6970 =	10.89%
f]
	After-tax interest payment [240*75%]	$          180
	Reduction (increase) in debt [(192+1300)-(100+1200)]	$         -192
	Payment of dividends	$          202
	Repurchase (Issue) stock	$         -101
	Purchase (Sale) of short-term investments	$            20
	Total	$              109