Question

Problem 2-12
Free Cash Flows

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

	2016		2015
Sales	$7,800.0		$6,500.0
Operating costs excluding depreciation	6,630.0		5,525.0
Depreciation and amortization	226.0		189.0
Earnings before interest and taxes	$944.0		$786.0
Less Interest	168.0		140.0
Pre-tax income	$776.0		$646.0
Taxes (40%)	310.4		258.4
Net income available to common stockholders	$465.6		$387.6
Common dividends	$419.0		$310.0

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

	2016		2015
Assets
Cash	$118.0		$91.0
Short-term investments	40.0		33.0
Accounts receivable	930.0		715.0
Inventories	1,404.0		1,170.0
Total current assets	$2,492.0		$2,009.0
Net plant and equipment	2,262.0		1,885.0
Total assets	$4,754.0		$3,894.0
Liabilities and Equity
Accounts payable	$813.0		$650.0
Accruals	650.0		520.0
Notes payable	156.0		130.0
Total current liabilities	$1,619.0		$1,300.0
Long-term debt	1,560.0		1,300.0
Total liabilities	$3,179.0		$2,600.0
Common stock	1,412.4		1,178.0
Retained earnings	162.6		116.0
Total common equity	$1,575.0		$1,294.0
Total liabilities and equity	$4,754.0		$3,894.0

Using Rhodes Corporation's financial statements (shown above), answer the following questions.

1. 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
   
2. 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
   
3. 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
   
4. 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
   
5. What is the ROIC for 2016? 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 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

a) NOPAT = Net Income + Net Interest*( 1 - Tax Rate )

NOPAT in 2016 = 465.6 + 168*(1 - 40%)

NOPAT in 2016 = 566.4 Million

b) In calculating Net Operating Working Capital Current Assets don't include short term investments and Current Liabilities don't include Notes Payable.

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

Net Operating Capital in 2015 = 91 + 715 + 1170 - 650 -520 = 806 Million

Net Operating Capital in 2016 = 118 + 40 + 1404 - 813 - 650 = 989 Million

c) Total Net Operating Capital for Both Years = 806 + 989 = 1795

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

Increase in Working Capital = Working Capital in 2016 - Working Capital in 2015

= (Total Current Assets in 2016 - Total Current Liabilities in 2016) - (Total Current Assets in 2015 - Total Current Liabilities in 2015) = 164

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

Capital Expenditures = 2262 - 1885 + 226 = 603

FCF in 2016 = 465.6 + 226 -164 - 603 = -75.4

e) ROIC = Net Operating Profit After Tax/ Invested Capital

NOPAT has already been calculated

Invested Capital = Long Term Debt + Equity = 3135

= 566.4/3135

= 18.07%