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 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
   
2. 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
   
3. 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
   
4. What is the ROIC for 2016? Round your answer to two decimal places.
     %
   
5. 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

Answer to a)

Net Operating Working Capital is the capital requirements for the company daily operation of the business. it will be the sum of operating current assets minus current liabilities. that is in the given question (Cash+Accounts receivable+inventories)-(Accounts Payable+Notes payable+Accruals)

So for the year 2015  Net Operating Working Capital would be :{($46+$525+$630)-($350+$140+$70)}=$641 Million

For the year 2016   Net Operating Working Capital would be{($51+$630+$788)-($455+$154+$81)}=$779 million

Answer to b)

Total Net Operating Capital is the operating capital less current liabilities

that is for 2015 $1989-($350+$140+$70)=$1429 million

that is for 2016 $2453 - ($455+$154+$81)=$1763 million

Answer to c)

Free cash flow for 2016. That is Net Income+Non Cash Expenses-increasing in working capital-capital expenditure

$373.2+$96-$138=$331.2 million

Answer to d)

ROIC (Return on Invested Capital) =Net Profit after taxes/Equity share+preference share+long term debt*100

so it would be $373.2 /($958+$805)*100=21.17% (Approx)