Question

FREE CASH FLOW

Arlington Corporation's financial statements (dollars and shares are in millions) are provided here.

Balance Sheets as of December 31
	2016		2015
Assets
Cash and equivalents	$  14,000		$  11,000
Accounts receivable	25,000		20,000
Inventories	21,520		19,000
Total current assets	$ 60,520		$ 50,000
Net plant and equipment	51,000		49,000
Total assets	$111,520		$99,000
Liabilities and Equity
Accounts payable	$ 10,600		$  9,500
Accruals	7,000		5,000
Notes payable	6,900		5,300
Total current liabilities	$ 24,500		$ 19,800
Long-term bonds	10,000		10,000
Total liabilities	$ 34,500		$ 29,800
Common stock (4,000 shares)	50,000		50,000
Retained earnings	27,020		19,200
Common equity	$ 77,020		$ 69,200
Total liabilities and equity	$111,520		$99,000

Income Statement for Year Ending December 31, 2016
Sales	$240,000
Operating costs excluding depreciation and amortization	190,000
EBITDA	$ 50,000
Depreciation & amortization	5,000
EBIT	$ 45,000
Interest	9,250
EBT	$ 35,750
Taxes (40%)	14,300
Net income	$ 21,450
Dividends paid	13,630

Enter your answers in millions. For example, an answer of $25,000,000,000 should be entered as 25,000.

1. What was net operating working capital for 2015 and 2016?

   2015	$    million
   2016	$    million

   
   
2. What was Arlington's 2016 free cash flow?
   
   $    million
   
3. Construct Arlington's 2016 statement of stockholders' equity.

   	Common Stock		Retained Earnings	Total Stockholders' Equity
   	Shares	Amount
   Balances, 12/31/15	million	$    million	$    million	$    million
   2016 Net Income			million
   Cash Dividends			million
   Addition to retained earnings				million
   Balances, 12/31/16	million	$    million	$    million	$    million

4. What was Arlington's 2016 EVA? Assume that its after-tax cost of capital is 10%. Round your answer to two decimal places.
   
   $    million
5. 
   
6. What was Arlington's MVA at year-end 2016? Assume that its stock price at December 31, 2016 was $25.
   
   $    million

Answer 1

a) Net operating Working Capital = Operating Current Asset- Operating Current Liabilities, Hence:

2015	$    30,200 million
2016	$    36,020 million

b) FCFF = (EBITDA*(1-tax rate)) + (Depreciation*tax rate) – Capital Expenditure - Working Capital Investment

= (50,000* (1-.40) + (5000*.40) - 7000 - 2820

=$22,180 million

Calculation of Capital Expenditure

Net plant and equipment as of 2016	51,000
Less: Depreciation for 2016	5,000
Less : Net plant and equipment as of 2015	-49,000
Capital Expenditure	7,000

Calculation of Working Capital Investment

Increase in Accounts receivable	5,000
Increase in Inventories	2,520
Less: Increase in Current Liabilities	-4,700
WC Inv	2,820

c)

	Common Stock		Retained (in millions)	Total Stockholders equity (in millions)
	Shares (in millions)	Amount (in millions
Balances, 12/31/15	4,000	50,000	19,200	69,200
2016 Net Income			21,450
Cash Dividends			-13,630
Addition to retained earnings			7,820
Balances, 12/31/16		50,000	27,020	77,020

  

d) EVA = NOPAT - (Total Assets - Current Liabilities)* Cost of capital after tax

= EBIT (1-tax rate) - (Total Assets - Current Liabilities)* Cost of capital after tax

= 45000 (1-.40) - (111520-24500)*.10

=$18,298 million

e) MVA = Market Value - Total Capital invested

= Number of Stock * stock price - (Total Assets - Current Liabilities)

= (4000*25) - (111520-24500)

= 100000 - 87020

= $ 12,980 million