Question

Free Cash Flows

Rhodes Corporation’s financial statements are shown below.

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

	2020			2019
Sales	$	12,000		$	10,000
Operating costs excluding depreciation		10,642			8,734
Depreciation and amortization		390			350
Earnings before interest and taxes	$	968		$	916
Less interest		240			200
Pre-tax income	$	728		$	716
Taxes (25%)		182			179
Net income available to common stockholders	$	546		$	537
Common dividends	$	204		$	200

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

	2020			2019
Assets
Cash	$	550		$	500
Short-term investments		220			200
Accounts receivable		2,750			2,500
Inventories		1,850			1,700
Total current assets	$	5,370		$	4,900
Net plant and equipment		3,650			3,500
Total assets	$	9,020		$	8,400
Liabilities and Equity
Accounts payable	$	1,100		$	1,000
Accruals		550			500
Notes payable		384			200
Total current liabilities	$	2,034		$	1,700
Long-term debt		1,100			1,000
Total liabilities	$	3,134			2,700
Common stock		4,344			4,500
Retained earnings		1,542			1,200
Total common equity	$	5,886		$	5,700
Total liabilities and equity	$	9,020		$	8,400

Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions.

1. What is the net operating profit after taxes (NOPAT) for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answer to the nearest whole number.

$    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.

2020: $    million

2019: $    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.

2020: $    million

2019: $    million

4. What is the free cash flow for 2020? Enter your answer in millions. For example, an answer of $1 million should be entered as 1, not 1,000,000. Cash outflow, if any, should be indicated by a minus sign. Round your answer to the nearest whole number.

$     million

5. What is the ROIC for 2020? 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 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.

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:

Answer-a:
NOPAT = Net Income + Net Interest*( 1 - Tax Rate )
NOPAT in 2020 = 546 + 240*(1 - 25%)
NOPAT in 2020 = $726 Million
Answer-b:
Net Operating Working Capital = (Cash + Accounts Receivable + Inventories) - ( Accruals + Accounts Payable).
Net Operating Capital in 2019 = (500 + 2,500 + 1,700) - (500 + 1,000) = $3,200 Million
Net Operating Capital in 2020 = (550 + 2,750 + 1,850) - (550 + 1,100) = $3,500 Million
Answer-c:
Total Net Operating Capital for Both Years = $3,200 + 3,500 = $6,700
Answer-d:
Free Cash Flow = Net Income + Non Cash Expenses - Increase in Working Capital - Capital Expenditures
Increase in Working Capital = Working Capital in 2020 - WorkingCapital in 2019
(Total Current Assets in 2020 - Total Current Liabilities in 2020) - (Total Current Assets in 2019 - Total Current Liabilities in 2019) = 136
Capital Expenditures = Net Plant & Equipment 2020 - Net Plant & Equipment 2019 + Depreciation & Amortization 2020
Capital Expenditures = 3,650 - 3,500 + 390 = 540
FCF in 2020 = 546 + 390 -136 - 540 = $260
Answer-e:
ROIC = Net Operating Profit After Tax/ Invested Capital
Invested Capital = Long Term Debt + Equity = 1,100 + 5,886 = 6,986
=726 / 6,986
=0.1039