Question

In: Finance

You’re an industry analyst for the telecomm sector, and have been analyzing financial reports from two...

You’re an industry analyst for the telecomm sector, and have been analyzing financial reports from two companies: CellT Corp. and Talk2Me Inc. The corporate tax rate for both firms is 35%. Your associate analyst has calculated and compiled, in the following table, a list of important figures you’ll probably need for the analysis:

Data Collected

CellT Corp.

Talk2Me Inc.
EBIT $132,500 $94,340
Depreciation $53,000 $37,736
Total operating capital $779,100 $607,910
Net investment in operating capital $371,000 $196,100
WACC 8.84% 11.50%

In your analysis, you want to look for several characteristics—one of them being the return on invested capital (ROIC). Using the information available, complete the following statements:

• The net operating profit after tax (NOPAT) for CellT Corp. is   , whereas the NOPAT for Talk2Me Inc. is   .
• CellT Corp. has a free cash flow of   , whereas, Talk2Me Inc. has a free cash flow of   .
• CellT Corp. has a   return on invested capital than Talk2Me Inc. has.

Your inference from the analysis is that both firms are in a high-growth phase, and their growth will be profitable. Considering your analysis, which of the following statements is true?

If a company has positive NOPAT but a negative free cash flow, then the firm could be in a high-growth phase and making investments in operating capital to support growth.

If a company has negative NOPAT but a positive free cash flow, then the firm could be in a high-growth phase and making investments in operating capital to support growth.

Solutions

Expert Solution

1. Net Operating Income After Tax

CellT Corp. = EBIT * (1 - Tax) = $132500 * 0.65 = $86125

Talk2Me Inc. = EBIT * (1 - Tax) = $94340 * 0.65 = $61321

2. Free cash Flow

CellT Corp. = EBIT * (1 - Tax) + Depreciation + Amortization + Change in Working Capital - Capital Expenditure

CellT Corp. = $86125 + 53000 - 779100 + 371000

CellT Corp. = - $268975

Talk2Me Inc = EBIT * (1 - Tax) + Depreciation + Amortization + Change in Working Capital - Capital Expenditure

Talk2Me Inc. = $61321 + 37736 - 607910 + 196100

Talk2Me Inc. = - $312753

3. Return on Invested Capital

CellT Corp. = Net Operating Income / Total Operating capital = $86125 / 779100 = 11.05%

Talk2Me Inc. = Net Operating Income / Total Operating capital = $61321 / 607910 = 10.09%

4. Option A is True

If a company has positive NOPAT but a negative free cash flow, then the firm could be in a high-growth phase and making investments in operating capital to support growth.

jeff jeffy answered 2 years ago
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