Question

Problem 2-12 Free Cash Flows

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

2016 2015 Sales $7,500.0 $6,000.0 Operating costs excluding depreciation 6,000.0 5,100.0 Depreciation and amortization 225.0 180.0 Earnings before interest and taxes $1,275.0 $720.0 Less: Interest 161.0 129.0 Pre-tax income $1,114.0 $591.0 Taxes (40%) 445.6 236.4 Net income available to common stockholders $668.4 $354.6 Common dividends $602.0 $284.0 Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars) 2016 2015 Assets Cash $94.0 $72.0 Short-term investments 38.0 30.0 Accounts receivable 825.0 660.0 Inventories 1,254.0 1,140.0 Total current assets $2,211.0 $1,902.0 Net plant and equipment 2,250.0 1,800.0 Total assets $4,461.0 $3,702.0 Liabilities and Equity Accounts payable $675.0 $540.0 Accruals 234.0 180.0 Notes payable 150.0 120.0 Total current liabilities $1,059.0 $840.0 Long-term bonds 1,500.0 1,200.0 Total liabilities $2,559.0 $2,040.0 Common stock 1,729.6 1,556.0 Retained earnings 172.4 106.0 Total common equity $1,902.0 $1,662.0 Total liabilities and equity $4,461.0 $3,702.0

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

Ans 1) NOPAT = net operating income * (1-tax rate)

= (7500 - 6000) * (1 - .4)

= 1500 *.6

= $900

ans 2) Net opeating working capital = operating current asset - operating current liabilities

for 2016 = 2211 - 1059

= $1152

for 2015 = 1902 - 840 = $1062

Ans 3) Net operating capital = Net operating working capital + non current operating asset

for 2016 = 1152 + 2250 = $3402

for 2015 = 1062 + 1800 = $2862

ans 4) Free cash flow = EBIT * (1 - tax rate) + dep/amort - change in working capital - capital expenditure

= 1275*.6 + 225 - (1152 -1062) - (2250 -1800)

= $450