9. Evaluating free cash flows and return on invested capital You’re an industry analyst for the...

9. Evaluating free cash flows and return on invested capital

You’re an industry analyst for the telecomm sector, and have been analyzing financial reports from two companies: Talker Corp. and MobileTalk Inc. The corporate tax rate for both firms is 35%. Your associate analyst has calculated and compiled, in the following table, a list of important figures you’ll probably need for the analysis:

Data Collected

	Talker Corp.	MobileTalk Inc.
EBIT	$176,300	$64,500
Depreciation	$58,179	$21,285
Total operating capital	$774,000	$402,480
Net investment in operating capital	$387,000	$167,700
WACC	11.85%	11.88%

In your analysis, you want to look for several characteristics—one of them being the return on invested capital (ROIC). Using the information available, complete the following statements:

•	Talker Corp. has a free cash flow than MobileTalk Inc. does.
•	The net operating profit after tax (NOPAT) for Talker Corp. is , whereas the NOPAT for MobileTalk Inc. is .
•	Talker Corp. has a return on invested capital of , whereas, MobileTalk Inc. has a return on invested capital of .

Your inference from the analysis is that both firms are in a high-growth phase, and their growth will be profitable. Considering your analysis, which of the following statements is true?

If a company has negative NOPAT but a positive free cash flow, then the firm could be in a high-growth phase and making investments in operating capital to support growth.

If a company has positive NOPAT but a negative free cash flow, then the firm could be in a high-growth phase and making investments in operating capital to support growth.

Expert Solution

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jeff jeffy answered 2 years ago

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