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		$	11,000
Operating costs excluding depreciation		10,550			9,674
Depreciation and amortization		370			330
Earnings before interest and taxes	$	1,080		$	996
Less interest		120			100
Pre-tax income	$	960		$	896
Taxes (25%)		240			224
Net income available to common stockholders	$	720		$	672
Common dividends	$	205		$	200

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

	2020			2019
Assets
Cash	$	550		$	500
Short-term investments		210			200
Accounts receivable		2,750			2,500
Inventories		1,550			1,400
Total current assets	$	5,060		$	4,600
Net plant and equipment		3,750			3,500
Total assets	$	8,810		$	8,100
Liabilities and Equity
Accounts payable	$	1,100		$	1,000
Accruals		550			500
Notes payable		348			200
Total current liabilities	$	1,998		$	1,700
Long-term debt		1,100			1,000
Total liabilities	$	3,098			2,700
Common stock		4,097			4,300
Retained earnings		1,615			1,100
Total common equity	$	5,712		$	5,400
Total liabilities and equity	$	8,810		$	8,100

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

a)

Net operating profit after taxes (NOPAT) = Net Income + Net Interest X (1 - Tax Rate)

Net operating profit after taxes (NOPAT) in 2020

=(720+120) X (1-25%)

630

Million

b)

In calculating Net Operating Working Capital Current Assetsdon't include short term investments and Current Liabilities don'tinclude Notes Payable.

Net Operating Working Capital = (Cash + Accounts Receivable + Inventories) - ( Accruals + Accounts Payable)

2019

2020

Net Operating Capital

3,700

3,952

c)

Total Net Operating Capital for Both Years = 3700 + 3952 =7652

Million

d)

Free Cash Flow = Net Income + Non Cash Expenses - Increase in Working Capital - Capital Expenditures

Increase in Working Capital = Working capital in 2020 - Working Capital in 2019

=3062-2900

162

Increase in Working Capital = 162

CAPITAL Expenditures = Net Plant & Equipment 2016 - NetPlant & Equipment 2015 + Depreciation & Amortization2016

Capital Expenditures = 3750 - 3500 + 370 = 620

Free Cash Flow in 2020 = 720 + 370 -162 - 620 = 308

e)

ROIC = Net Operating Profit After Tax/ Invested Capital

Net Operating Profit After Tax already been calculated

Invested Capital = Long Term Debt + Equity = 6812

= 630/6812

9.25%