Question

Rhodes Corporation’s financial statements are shown below.

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

	2020			2019
Sales	$	11,000		$	10,000
Operating costs excluding depreciation		9,608			8,700
Depreciation and amortization		400			360
Earnings before interest and taxes	$	992		$	940
Less interest		260			200
Pre-tax income	$	732		$	740
Taxes (25%)		183			185
Net income available to common stockholders	$	549		$	555
Common dividends	$	203		$	200

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

	2020			2019
Assets
Cash	$	650		$	600
Short-term investments		210			200
Accounts receivable		2,750			2,500
Inventories		1,650			1,400
Total current assets	$	5,260		$	4,700
Net plant and equipment		3,750			3,500
Total assets	$	9,010		$	8,200
Liabilities and Equity
Accounts payable	$	1,300		$	1,200
Accruals		650			600
Notes payable		192			100
Total current liabilities	$	2,142		$	1,900
Long-term debt		1,300			1,200
Total liabilities	$	3,442			3,100
Common stock		4,322			4,200
Retained earnings		1,246			900
Total common equity	$	5,568		$	5,100
Total liabilities and equity	$	9,010		$	8,200

 

Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions.

a. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000.

b. 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.

c. 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.

d. What is the free cash flow for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Cash outflow, if any, should be indicated by a minus sign.

e. What is the ROIC for 2020?

Answer 1

Rhodes Corporation
Income Statements
for Year Ending December 31
(Millions of Dollars)	2020			2019
Sales	$	11,000		$	10,000
Operating costs excluding depreciation		9,608			8,700
Depreciation and amortization		400			360
Earnings before interest and taxes	$	992		$	940
Less interest		260			200
Pre-tax income	$	732		$	740
Taxes (25%)		183			185
Net income available to common stockholders	$	549		$	555
Common dividends	$	203		$	200
Rhodes Corporation
Balance Sheets
as of December 31
(Millions of Dollars)	2020			2019
Assets
Cash	$	650		$	600
Short-term investments		210			200
Accounts receivable		2,750			2,500
Inventories		1,650			1,400
Total current assets	$	5,260		$	4,700
Net plant and equipment		3,750			3,500
Total assets	$	9,010		$	8,200
Liabilities and Equity
Accounts payable	$	1,300		$	1,200
Accruals		650			600
Notes payable		192			100
Total current liabilities	$	2,142		$	1,900
Long-term debt		1,300			1,200
Total liabilities	$	3,442			3,100
Common stock		4,322			4,200
Retained earnings		1,246			900
Total common equity	$	5,568		$	5,100
Total liabilities and equity	$	9,010		$	8,200

 

a.

NOPAT =	Operating Profit X (1-Tax rate)
=	992*(1-0.25)
=	$744	million

 

 

b.

NOWC=	Operating Current Assets - Operating Current Liabilities
=	(Cash +Account Receivable+Inventories) -€“ (Account Paybale + Accruals)
2020 =	($650+2,750+1,650)-($1,300+650)
=	3,100	million
2019=	($600+2,500+1,400)-($1,200+600)
=	2,700	million

 

c.

NOC =	NOWC+Operating Long-term Assets

2,700m