Question

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

	2018		2017
Sales	$7,800.0		$6,000.0
Operating costs excluding depreciation	5,850.0		5,100.0
Depreciation and amortization	216.0		180.0
Earnings before interest and taxes	$1,734.0		$720.0
Less Interest	168.0		129.0
Pre-tax income	$1,566.0		$591.0
Taxes (40%)	626.4		236.4
Net income available to common stockholders	$939.6		$354.6
Common dividends	$846.0		$284.0

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

	2018		2017
Assets
Cash	$90.0		$72.0
Short-term investments	39.0		30.0
Accounts receivable	975.0		780.0
Inventories	1,512.0		1,260.0
Total current assets	$2,616.0		$2,142.0
Net plant and equipment	2,160.0		1,800.0
Total assets	$4,776.0		$3,942.0
Liabilities and Equity
Accounts payable	$468.0		$360.0
Accruals	345.0		300.0
Notes payable	156.0		120.0
Total current liabilities	$969.0		$780.0
Long-term debt	1,560.0		1,200.0
Total liabilities	$2,529.0		$1,980.0
Common stock	2,047.4		1,856.0
Retained earnings	199.6		106.0
Total common equity	$2,247.0		$1,962.0
Total liabilities and equity	$4,776.0		$3,942.0

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

 

1. What is the net operating profit after taxes (NOPAT) for 2018? 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 answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.
   2018: $   million
   2017: $   million
   
   
3. What are the amounts of total net operating capital for both years? Enter your answers in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number.
   2018: $   million
   2017: $   million

Answer 1

NOPAT represents a company's theoretical income from operations if it had no debt (no interest expense).It measures a company's financial performance without considering the tax savings of debt.

 

Requirement 1 :

Earnings before interest and taxes(EBIT)

Net operating profit after taxes (NOPAT)NOPAT  = EBIT * (1 - tax rate)

Year 2018 NOPAT = $1734 * (1 - 40%) = $1040.4 million

Requirement 2:

Net Operating Working Capital (NOWC) = (Cash + Accounts Receivable + Inventories)− (Accounts Payable + Accrued Expenses)

2018  NOWC =  ( 90 +975 + 1512 ) -">−- (468+345) = $1,764 million

2017 NOWC =    ( 72+780 + 1260) -">−- (360 +300 ) = $1,452 million

Requirement 3 :

Total Net operating working capital=Net operating working capital+ Net fixed assets

net fixed assets = net plant and equipment

2018 = $1,764 million + $2,160 million = $3,924 million

2017 = $ 1.452 million + $1800 million = $3,252 million

Year 2018 NOPAT = $1734 * (1 - 40%) = $1040.4 million