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

1. 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
   
2. 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
   
3. What is the ROIC for 2018? Round your answer to two decimal places.
   %
   
4. 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.

   Reduction (increase) in debt	$    million
   Repurchase (Issue) stock	$    million

Answer 1

a) Total net operating capital = (operating current assets - operating current liabilities) + Non-current operating assets

So, the amounts of total operating capital of Rhodes corporation are calculated as under:

Note: we ignored short-term investments as these are treated as non-operating current assets.

b) Free cash flow for 2018 is $40 million.

d) Utilization of FCF by Rhodes for different activities as explained by the cash flow statement above:

1. after tax interest = $ 198 million
2. Net Debt repayments = - $ 240 million (as the firm borrowed more loan)
3. Dividends = $1,002 million
4. net stock repurchases = $ 63.60 million
5. net purchases of short term investments = $ 6 million

c)

ROIC or Return on Invested Capital is the income generated from the total capital invested in a company. Its formula is as under:

ROIC = (EBIT - taxes) / (Long Term Debt + Equity)

So, ROIC of Rhodes = 1311.6 / 3720 = 0.35 or 35%