Question

FREE CASH FLOW

Arlington Corporation's financial statements (dollars and shares are in millions) are provided here.

Balance Sheets as of December 31
	2016		2015
Assets
Cash and equivalents	$  14,000		$  13,000
Accounts receivable	35,000		30,000
Inventories	33,265		27,000
Total current assets	$ 82,265		$ 70,000
Net plant and equipment	49,000		45,000
Total assets	$131,265		$115,000
Liabilities and Equity
Accounts payable	$ 10,800		$  9,500
Accruals	7,700		7,000
Notes payable	6,000		5,000
Total current liabilities	$ 24,500		$ 21,500
Long-term bonds	15,000		15,000
Total liabilities	$ 39,500		$ 36,500
Common stock (4,000 shares)	60,000		60,000
Retained earnings	31,765		18,500
Common equity	$ 91,765		$ 78,500
Total liabilities and equity	$131,265		$115,000

Income Statement for Year Ending December 31, 2016
Sales	$231,000
Operating costs excluding depreciation and amortization	190,000
EBITDA	$ 41,000
Depreciation & amortization	3,000
EBIT	$ 38,000
Interest	1,950
EBT	$ 36,050
Taxes (40%)	14,420
Net income	$ 21,630
Dividends paid	8,365

Enter your answers in millions. For example, an answer of $25,000,000,000 should be entered as 25,000.

What was net operating working capital for 2015 and 2016?

2015	$    million
2016	$    million

What was Arlington's 2016 free cash flow?

$    million

Construct Arlington's 2016 statement of stockholders' equity.

	Common Stock		Retained Earnings	Total Stockholders' Equity
	Shares	Amount
Balances, 12/31/15	million	$    million	$    million	$    million
2016 Net Income			million
Cash Dividends			million
Addition to retained earnings				million
Balances, 12/31/16	million	$    million	$    million	$    million

What was Arlington's 2016 EVA? Assume that its after-tax cost of capital is 10%. Round your answer to two decimal places.

$    million

What was Arlington's MVA at year-end 2016? Assume that its stock price at December 31, 2016 was $25.

$    million

Answer 1

1. Net working capital : Total CA - (AP + Accruals)

2015 = 70,000 - (9,500 + 7,000) = $53,500

2016 = 82265 – (10,800 + 7,700) = $63,765

1. Arlington's 2016 free cash flow: FCF= EBIT (1 – T) + Deprec. – Capital expenditures – ?NWC

2016 FCF = 38,000 ( 1 – 0.4 ) + 3,000 - 7,000 - 10,265 = $8,535

Note: To arrive at capital expenditures you add depreciation to the change in net FA, so Capital expenditures = $3,000 + $,4,000 = $7,000

1. Arlington's 2016 statement of stockholders' equity:

	Common Stock		Retained	Total Stockholders'
	Shares	Amont	Earnings	Equity
Balances, 12/31/15	million	$    million	$    million	$    million
2016 Net Income	4,000	60,000	40,130	78,500
Cash Dividends			-8,365
Addition to retained earnings			8,365	8,365
Balances, 12/31/16	4,000	60,000	31,765	86,865

1. Arlington's 2016 EVA : EVA= Earning before interest and tax(1-tax rate)-(total invest capital* 10%)

Total Invested Capital: 38,000 + 63,765

EVA = (38,000(1-0.4) – (101,765 *10%)

= 22,800 – 10,176.5

= 12,623.5

1. Arlington's MVA at year-end 2016: 25* outstanding shares- total common equity

= 25*4000-86220

= 100,000-86,220

= 13,780