Question

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	$229,600	$84,000
Depreciation	$75,768	$27,720
Total operating capital	$1,008,000	$524,160
Net investment in operating capital	$504,000	$218,400
WACC	11.85%	11.88%

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 a   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

1.NOPAT= EBIT(1-Tax rate)

BlastTel Inc

NOPAT= 229600(1-0.35)= $1,49,240

SaneTel Corp.

NOPAT= 84,000(1-0.35)= $54,600

The net operating profit after tax (NOPAT) for BlastTel Inc. is $1,49,240 , whereas the NOPAT for SaneTel Corp. is $54,600.

2. Free Cash flows= NOPAT- Net Investment in Working capital

BlastTel Inc.

FCF= 1,49240- 5,04,000= $(3,54,760)

SaneTel Corp.

FCF=54,600-218400= $(1,63,800)

BlastTel Inc. has a free cash flow of $(3,54,760)   , whereas, SaneTel Corp. has a free cash flow of $(1,63,800)

3. Return on Invested capital= (NOPAT/ Invested Capital) *100

BlastTel Inc.

ROIC= (149240/504000)*100= 29.61%

SaneTel Corp.

ROIC= (54600/218400)*100= 25%

BlastTel Inc. has a   return on invested capital 29.61% than SaneTel Corp. has. 25%

As per the analysis it has been seen that 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 because ROIC is greater than WACC.

On the contrary it has been seen that FCF are negative.