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	$	13,000		$	11,000
Operating costs excluding depreciation		11,600			9,730
Depreciation and amortization		340			330
Earnings before interest and taxes	$	1,060		$	940
Less interest		140			100
Pre-tax income	$	920		$	840
Taxes (25%)		230			210
Net income available to common stockholders	$	690		$	630
Common dividends	$	205		$	200

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

	2020			2019
Assets
Cash	$	650		$	600
Short-term investments		220			200
Accounts receivable		2,750			2,500
Inventories		1,650			1,500
Total current assets	$	5,270		$	4,800
Net plant and equipment		3,750			3,500
Total assets	$	9,020		$	8,300
Liabilities and Equity
Accounts payable	$	1,300		$	1,200
Accruals		650			600
Notes payable		368			200
Total current liabilities	$	2,318		$	2,000
Long-term debt		1,300			1,200
Total liabilities	$	3,618			3,200
Common stock		3,917			4,100
Retained earnings		1,485			1,000
Total common equity	$	5,402		$	5,100
Total liabilities and equity	$	9,020		$	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.

   $   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: $   million

   2019: $   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: $   million

   2019: $   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.

     %

6. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) 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.

   After-tax interest payment	$    million
   Reduction (increase) in debt	$    million
   Payment of dividends	$   million
   Repurchase (Issue) stock	$   million
   Purchase (Sale) of short-term investments	$   million

Answer 1

NOPAT is earnings before interest and taxes (EBIT) adjusted for the impact of taxes

A) NOPAT=EBIT*(1-tax)
for 2020 = 1060*(1-.25%)
=795

In calculating Net Operating Working Capital Current Assets don't include short term investments and Current Liabilities don't include Notes Payable.

b)Net operating working capital=(Cash+inventory+acc rec)-(accrual+account payable)
2020=(650+1650+2750)-(650+1300)=3100
2019=(600+1500+2500)-(600+1200)=2800

c) Total Net operating working capital=Net operating working capital+net fixed assets
2020=3100+3750=6850
2019=2800+3500=6300

d) Free cash flow in 2020=OCF-Change in NOWC-capex

OCF=EBIT*(1-tax)+Dep
=(1060*(1-0.25%)) + 340 = 1135
Change in NOWC=3100 - 2800 = 300
Capex= 3750 - 3500 = 250
free cash flow= 1135 - 300 - 250
= 585

e) ROIC = Net Operating Profit After Tax/ Invested Capital

NOPAT has already been calculated

Invested Capital = Long Term Debt + Equity = 1300+3917 =5217

= 795/5217

= 15.23 %