Question

Problem 2-12
Free Cash Flows

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

	2016		2015
Sales	$4,025.0		$3,500.0
Operating costs excluding depreciation	3,220.0		2,975.0
Depreciation and amortization	96.0		77.0
Earnings before interest and taxes	$709.0		$448.0
Less Interest	87.0		75.0
Pre-tax income	$622.0		$373.0
Taxes (40%)	248.8		149.2
Net income available to common stockholders	$373.2		$223.8
Common dividends	$336.0		$179.0

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

	2016		2015
Assets
Cash	$51.0		$46.0
Short-term investments	21.0		18.0
Accounts receivable	630.0		525.0
Inventories	788.0		630.0
Total current assets	$1,490.0		$1,219.0
Net plant and equipment	963.0		770.0
Total assets	$2,453.0		$1,989.0
Liabilities and Equity
Accounts payable	$455.0		$350.0
Accruals	154.0		140.0
Notes payable	81.0		70.0
Total current liabilities	$690.0		$560.0
Long-term debt	805.0		700.0
Total liabilities	$1,495.0		$1,260.0
Common stock	853.8		662.0
Retained earnings	104.2		67.0
Total common equity	$958.0		$729.0
Total liabilities and equity	$2,453.0		$1,989.0

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
2. What are the amounts of net operating working capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
3. What are the amounts of total net operating capital for both years? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.
   2016 $   million
   2015 $   million
   
4. What is the free cash flow for 2016? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to one decimal place.
   $   million
   
5. What is the ROIC for 2016? 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 answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answers to one decimal place.

   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

	a	Net Operating Profit after taxes(NOPAT)	($million)
		Earning Before Interest and Taxes	$709
		Tax rate	40%
		Net Operating Profit after taxes(NOPAT)	$425.40	(709*(1-0.4)
	b	Net Operating Working Capital
			2016	2015
	A	Total current assets	$1,490.00	$1,219.00
	B	Total current liabilities	$690.00	$560.00
	C=A-B	Net Operating Working Capital	$800.00	$659.00
		Net Operating Working Capital2016	$800.00
		Net Operating Working Capital 2015	$659.00
	c	Total net operating capital
			2016	2015
	A	Net Operating Working Capital	$800.00	$659.00
		Non Current Operating Assets:
	B	Net plant and equipment	$963.00	$770.00
	C=A+B	Total net operating capital	$1,763.00	$1,429.00
		Total net operating capital 2016	$1,763.00
		Total net operating capital 2015	$1,429.00
	d	Free cash flow for 2016
		Operating Cah Flow:
	A	Net Income	$373.20
	B	Depreciation and amortization	$96.00
	C	(Increase)/Decrease in Net Operating Working capital	($141.00)	(659-800)
	D=A+B+C	Operating Cah Flow	$328.20
		Purchase of Plant & Equipment:
	E	Net Plant & Equipment 2015	$770
	F	Depreciation expense 2016	$96.00
	G	Purchase of Plant & Equipment:	$289.00
	H=E-F+G	Net Plant & Equipment 2016	$963.00
		Free Cash Flow=(Operating Cash Flow )-(purchase of fixed assets)
	I=D-G	Free Cash Flow in 2016	$39.20
	e	ROIC of 2016
		ROIC=NOPAT /Invested Capital
	A	NOPAT 2016(from(a)	$425.40
		Invested Capital:
		Long Term Debt	$805.00
		Total Common Equity	$958.00
	B	Invested capital	$1,763.00
	C=A/B	ROIC	0.24129325
		ROIC(Percentage)	24.13%