Question

Last year Miami Rivet had $5 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 25%. At year-end, it had $14 million in operating current assets, $3 million in accounts payable, $1 million in accruals, $2 million in notes payable, and $15 million in net plant and equipment. Assume Miami Rivet has no excess cash. Miami Rivet uses only debt and common equity to fund its operations. (In other words, Miami Rivet has no preferred stock on its balance sheet.) Miami Rivet had no other current liabilities. Assume that Miami Rivet only noncash item was depreciation. Based on this information answer the following questions:

1)What was the company's net income? You should enter the full number i.e. if your calculations result in a net income of 1 million enter 1000000.

2)What was its net operating working capital (NOWC)? You should enter the full number i.e. if your calculations result in a NOWC of 1 million enter 1000000.

Answer 1

Based on the given data, pls find below:

Since EBIT is arleady given, there is no need to consider Depreciation separately: EBIT = EBITDA - depreciation Expense.

		$
Operating Income (EBIT)	50,00,000
Less: Interest Expense	10,00,000
Earnings Before Tax (EBT)	40,00,000
Less: Tax Expense @ 25%	10,00,000
Net Income		30,00,000
		$
Operating Current Assets	1,40,00,000
Less: Accounts Payable	30,00,000
Less: Accruals		10,00,000
Net Operating Working Capital	1,00,00,000

Net Operating Working Capital = Operating Current Assets - Operating Current Liabilities; These include only those current assets and current liabiliites which are direclty attributable / involved as part of operations of the company. Eventhough current liabilities include certain components like liquid portion of long term borrowings, notes payable, etc these are not considered as Operating current liabilities; Also, Net Plant and Equipment is not a Current asset, its a Fixed asset (Non Current Asset) and hence not considered above;