Question

Problem 2-12
Free Cash Flows

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

	2016		2015
Sales	$7,150.0		$6,500.0
Operating costs excluding depreciation	5,363.0		5,525.0
Depreciation and amortization	187.0		156.0
Earnings before interest and taxes	$1,600.0		$819.0
Less: Interest	154.0		140.0
Pre-tax income	$1,446.0		$679.0
Taxes (40%)	578.4		271.6
Net income available to common stockholders	$867.6		$407.4
Common dividends	$781.0		$326.0

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

	2016		2015
Assets
Cash	$118.0		$98.0
Short-term investments	36.0		33.0
Accounts receivable	822.0		715.0
Inventories	1,144.0		1,040.0
Total current assets	$2,120.0		$1,886.0
Net plant and equipment	1,872.0		1,560.0
Total assets	$3,992.0		$3,446.0
Liabilities and Equity
Accounts payable	$598.0		$520.0
Accruals	423.0		325.0
Notes payable	143.0		130.0
Total current liabilities	$1,164.0		$975.0
Long-term bonds	1,430.0		1,300.0
Total liabilities	$2,594.0		$2,275.0
Common stock	1,189.4		1,049.0
Retained earnings	208.6		122.0
Total common equity	$1,398.0		$1,171.0
Total liabilities and equity	$3,992.0		$3,446.0

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

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

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

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

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

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

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

1) NOPAT
EBIT	$1,600	Millions
Less: Tax Rate 40%	-$640	Millions
Net operating profit after taxes (NOPAT)	$960	Millions
2)
Net Operating Working Capital = Operating Current Assets - Operating Current Liabilities	2016	2015
Operating Current Assets	Millions	Millions
Cash	$118	$98
Accounts receivable	822	715
Inventories	1144	1040
Total Operating current assets	$2,084	$1,853
Less: Operating Current Liabilities
Accounts payable	$598	$520
Accruals	$423	$325
Total Operating current liabilities	$1,021	$845
NOWC = OCA - OCL	$1,063	$1,008	Millions
3)	2016	2015
Total net operating capital	Millions	Millions
Net Operating Working Capital	$1,063	$1,008
Add: Net plant and equipments	$1,872	$1,560
Total net operating capital	$2,935	$2,568	milions
4)
Free cash flow for 2016
NOPAT	$960	millions
Less: Investment in total net operating Capital($2935 -$2568)millions	-$367	millions
Free cash flow for 2016	$593	millions
5)
ROIC for 2016
Return on invested capital (ROIC) = NPOAT/Total net operating capital = $960/$2935	32.71%
6)
After-tax interest payment = ($154 x (1-40%)	92.4	millions
Reduction (increase) in debt = ($130 + $1,300) – ($143 + $1,430)	-143	millions
Payment of dividends	$781.00	millions
Repurchase (Issue) stock ($1189.4 - 1049)	-140.4	millions
Purchase (Sale) of short-term investments	3	millions