Question

Free Cash Flows

Rhodes Corporation’s financial statements are shown below.

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

	2020			2019
Sales	$	12,000		$	11,000
Operating costs excluding depreciation		10,600			9,722
Depreciation and amortization		380			350
Earnings before interest and taxes	$	1,020		$	928
Less interest		140			100
Pre-tax income	$	880		$	828
Taxes (25%)		220			207
Net income available to common stockholders	$	660		$	621
Common dividends	$	202		$	200

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

	2020			2019
Assets
Cash	$	550		$	500
Short-term investments		110			100
Accounts receivable		2,750			2,500
Inventories		1,850			1,700
Total current assets	$	5,260		$	4,800
Net plant and equipment		3,750			3,500
Total assets	$	9,010		$	8,300
Liabilities and Equity
Accounts payable	$	1,100		$	1,000
Accruals		550			500
Notes payable		190			100
Total current liabilities	$	1,840		$	1,600
Long-term debt		1,100			1,000
Total liabilities	$	2,940			2,600
Common stock		4,412			4,500
Retained earnings		1,658			1,200
Total common equity	$	6,070		$	5,700
Total liabilities and equity	$	9,010		$	8,300

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

1. 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. Round your answer to the nearest whole number.

   $ 765 million

2. 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. Round your answers to the nearest whole number.

   2020: $ 3500 million

   2019: $ 3200 million

3. 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.

   2020: $ 7250 million

   2019: $ 6700 million

4. 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. Round your answer to the nearest whole number.

   $ ??? million

5. What is the ROIC for 2020? Round your answer to two decimal places.

   ??? %

Answer 1

d.

NOPAT = EBIT (1-t) = 1020 (1-0.25) = $ 765 million

Free cash flows = NOPAT – Change in operating working capital – New Investment in fixed assets

                                = NOPAT – (NOWC 2020 – NOWC 2019) – (Balance 2020 – Balance 2019)

                                = 765 – (3500-3200) – (3750-3500)

                                = 765 – 300 – 250            

                                = $ 215 million

NOWC figures taken from the calculation in requirement b.

e.

ROIC = NOPAT/ Total net operating capital

                = 765/7250

                = 10.55%