Question

Free Cash Flows

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

	2018		2017
Sales	$9,200.0		$8,000.0
Operating costs excluding depreciation	6,900.0		6,800.0
Depreciation and amortization	246.0		224.0
Earnings before interest and taxes	$2,054.0		$976.0
Less Interest	198.0		172.0
Pre-tax income	$1,856.0		$804.0
Taxes (40%)	742.4		321.6
Net income available to common stockholders	$1,113.6		$482.4
Common dividends	$1,002.0		$386.0

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

	2018		2017
Assets
Cash	$146.0		$112.0
Short-term investments	46.0		40.0
Accounts receivable	1,196.0		1,040.0
Inventories	1,496.0		1,360.0
Total current assets	$2,884.0		$2,552.0
Net plant and equipment	2,464.0		2,240.0
Total assets	$5,348.0		$4,792.0
Liabilities and Equity
Accounts payable	$800.0		$640.0
Accruals	644.0		560.0
Notes payable	184.0		160.0
Total current liabilities	$1,628.0		$1,360.0
Long-term debt	1,840.0		1,600.0
Total liabilities	$3,468.0		$2,960.0
Common stock	1,623.4		1,687.0
Retained earnings	256.6		145.0
Total common equity	$1,880.0		$1,832.0
Total liabilities and equity	$5,348.0		$4,792.0

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

1. What is the net operating profit after taxes (NOPAT) for 2018? 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 answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.
   2018: $    million
   2017: $    million
   
3. What are the amounts of total net operating capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.
   2018: $    million
   2017: $    million
   
4. What is the free cash flow for 2018? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Cash outflow, if any, should be indicated by a minus sign. Round your answer to one decimal place.
   $    million
   
5. What is the ROIC for 2018? 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

Answer a

NOPAT = Operating Income *(1-Tax Rate)

Operatinf Income for 2018 = Sales- Operating Expenses = 9200-6900 = $2300 mn

Hence NOPAT = 2300*(1-40%) = 2300*0.6 = 1380

Hence Answer is $1380.0 mn

Answer b

Net Operating Working Capital (NOWC) = (Cash+ Accounts Receivable + Inventories)-(Accounts Payable+ Accruals)

NOWC for 2017 =(112+1040+1360)-(640+560) = 2512-1200=$1312 mn

NOWC for 2018 =(146+1196+1496)-(800+644) = 2838-1444=$1394 mn

Answer c

Total Net Operating Capital(NOC) = NOWC + NOn Current Operating Assets

Hence NOC 2017 = 1312+2240=$3552 mn

NOC 2018 = 1394+2464=$3858 mn

Answer d

Free cashflow 2018 = EBIT*(1-T)+ Depreciation - Capital Expenditure- Change in WC

Capital Expenditure = Capital 2018-Capital 2017=2464-2240=$224 mn

Change in Working Capital = Working Capital 2018- Working Capital 2017 = (2884-1628)-(2552-1360) = 1256-1192=$64 mn

Hence FCF = 2054*(1-40%)+246-224-64 = 2054*0.6 -42 = 1232.4-42=$1190.4 mn

Answer e

ROIC = NOPAT/ Invested capital

Invested capital= Total Liabilitiees- Current liabilities = 5348-1628=$3720

Hence ROIC = 1380/3720=37.10%

Answer f

After tax intesrest = Intesrest *(1-Tax)= 198*(1-40%)=198*0.6=$118.8 mn

Reduction in Debt = Long term Debt 2017-Long term Debt 2018 = 1600-1840=-$240 mn

Payment of Dividends = $1002 mn

Repurchase of Stock= Common Stock 2017- Common Stock 2018 = 1687-1623.4 = $63.6 mn

Purchase of Short Term Investments = Short Term Investments 2018-Short Term Investments2017 = 46-40= $6 mn