Question

Click here to read the eBook: Free Cash Flow Problem Walk-Through 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 $ 12,000 Accounts receivable 35,000 30,000 Inventories 32,675 28,000 Total current assets $ 81,675 $ 70,000 Net plant and equipment 52,000 47,000 Total assets $133,675 $117,000 Liabilities and Equity Accounts payable $ 10,100 $ 9,500 Accruals 7,100 6,000 Notes payable 6,100 5,400 Total current liabilities $ 23,300 $ 20,900 Long-term bonds 20,000 20,000 Total liabilities $ 43,300 $ 40,900 Common stock (4,000 shares) 40,000 40,000 Retained earnings 50,375 36,100 Common equity $ 90,375 $ 76,100 Total liabilities and equity $133,675 $117,000 Income Statement for Year Ending December 31, 2016 Sales $249,000 Operating costs excluding depreciation and amortization 200,000 EBITDA $ 49,000 Depreciation & amortization 4,000 EBIT $ 45,000 Interest 5,500 EBT $ 39,500 Taxes (40%) 15,800 Net income $ 23,700 Dividends paid 9,425 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?What was Arlington's 2016 free cash flow?

Construct Arlington's 2016 statement of stockholders' equity.   

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

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

Answer 1

Part A)

The net operating working capital for 2015 and 2016 is calculated as below:

Net Operating Working Capital = Current Assets - (Current Liabilities - Notes Payable)

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Using the values provided in the question in the above formula, we get,

Net Operating Working Capital (2016) = 81,675 - (23,300 - 6,100) = $64,475

Net Operating Working Capital (2015) = 70,000 - (20,900 - 5,400) = $54,500

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Part 2)

The value of 2016's free cash flow is determined as follows:

Free Cash Flow = Earnings Before Interest and Taxes*(1-Tax Rate) + Depreciation - Capital Expenditure - Change in Net Operating Working Capital

Using the values provided in the question in the above formula, we get,

Free Cash Flow = 45,000*(1-40%) + 4,000 - (52,000 - 47,000 + 4,000) - (64,475 - 54,500) = $12,025

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Part 3)

The Arlington's 2016 statement of stockholders' equity is constructed as below:

Arlington
Statement of Stockholder's Equity
2016
Common Stock	40,000
Retained Earnings (36,100 + 23,700 - 9,425)	50,375
Total Stockholder's Equity	$90,375

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Part 4)

The EVA is calculated with the use of following formula:

EVA = Earnings Before Interest and Taxes*(1-Tax Rate) - (Total Invested Capital*After-Tax Cst of Capital)

Susbtituting values in the above formula, we get,

EVA = 45,000*(1-40%) - ((52,000 + 64,475)*10%) = $15,352.50

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Part 5)

The value of MVA is determined as below:

MVA = Number of Outstanding Shares*Stock Price at December 31, 2016 - Total Stockholder's Equity = 4,000*25 - 90,375 = $9,625