Question

10. Evaluating free cash flows and return on invested capital

You’re an industry analyst for the telecomm sector, and have been analyzing financial reports from two companies: BlastTel Inc. and SaneTel Corp. 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

	BlastTel Inc.	SaneTel Corp.
EBIT	$122,500	$87,220
Depreciation	$49,000	$34,888
Total operating capital	$720,300	$562,030
Net investment in operating capital	$343,000	$181,300
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 BlastTel Inc. is , whereas the NOPAT for SaneTel Corp. is .
•	BlastTel Inc. has a free cash flow of , whereas, SaneTel Corp. has a free cash flow of   .
•	BlastTel Inc. has ahigher   return on invested capital than SaneTel Corp. 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 ROIC is greater than the rate of return that investors require, which is the weighted average cost of capital (WACC), then the firm is adding value.

If ROIC is less than the rate of return that investors require, which is the weighted average cost of capital (WACC), then the firm is adding value.

Answer 1

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