Question

Last year Miami Rivet had $5 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 million, and its corporate tax rate was 25%. At year-end, it had $14 million in operating current assets, $3 million in accounts payable, $1 million in accruals, $2 million in notes payable, and $15 million in net plant and equipment. Assume Miami Rivet has no excess cash. Miami Rivet uses only debt and common equity to fund its operations. (In other words, Miami Rivet has no preferred stock on its balance sheet.) Miami Rivet had no other current liabilities. Assume that Miami Rivet only noncash item was depreciation. Based on this information answer the following questions:

a) What was the company’s net income?

b. What was its net operating working capital (NOWC)?

c.What was its net working capital (NWC)?

d. Miami Rivet had $12 million in net plant and equipment the prior year. Its net operating working capital has remained constant over time. What is the company’s free cash flow (FCF) for the year that just ended? Note that capital expenditures are equal to the change in net plant and equipment plus the annual depreciation expense.

e.Miami Rivet has 500,000 common shares outstanding, and the common stock amount on the balance sheet is $5 million. The company has not issued or repurchased common stock during the year. Last year’s balance in retained earnings was $11.2 million, and the firm paid out dividends of $1.8 million during the year. Based on this information Miami Rivet’s end-of-year Retained Earnings are:

f.Miami Rivet has 500,000 common shares outstanding, and the common stock amount on the balance sheet is $5 million. The company has not issued or repurchased common stock during the year. Last year’s balance in retained earnings was $11.2 million, and the firm paid out dividends of $1.8 million during the year. Based on this information Miami Rivet’s Total Stockholders’ Equity is:

g.If the firm’s stock price at year-end is $52, what is the firm’s market value added (MVA)?

h.If the firm’s after-tax percentage cost of capital is 9%, what is the firm’s Long-term debt at year-end?

i.If the firm’s after-tax percentage cost of capital is 9%, what is the firm’s total invested capital at year-end?

j.If the firm’s after-tax percentage cost of capital is 9%, what is the firm’s EVA at year-end?

Answer 1

a. working in excel

Amt in $ mn А 16 Heads 17 EBIT 18 Deprecation 19 Interest Exp 20 Income before tax 21 tax @25% 22 Net income 3 =B17-B18-B19 0.75 =B20*0.25 2.25 =B20*B21

Net Income is $ 2.25 million

b.Net operating working capital = $ 10 million (working in excel)

А в 23 24 Net operating working capital Amt in $ mn 25 Operation Current Assets 26 Accounts Payable 27 Accruals 28 Total 10 =B25-B26-B27 29

c. Net Working Capital = $ 8 million (working in excel)

C D Amt in s 30 31 Net working capital 32 Operation Current Assets 33 Accounts Payable 34 Accruals 35 Notes Payable 36 Total 37 20 8 =B32-B33-B34-B35

d.

Free Cash Flow formula is

Net Income + Depreciation/Amortization - Change in Working Captial - Capital Expenditure

Capital expenditure = previous Plant and equipment – current plant and equipment + current deprecation

= 15-12+1

Capital expenditure = 4

Net operation capital has remained constant so there is no change in working capital

So

Free Cash Flow = 2.25 + 1-0-4

Free Cash Flow = -0.75

e.

Retained Earnings Formula and Calculation

RE= BP+Net Income (or Loss)−C−S

where:

BP=Beginning Period RE

C=Cash dividends

S=Stock dividends

=11.2 +2.25 -1.8 -0

RE = $11.65 million

f. formula for Total shareholders equity,

Total Stockholders’ Equity = Retained earning + Common stock

= 11.65 (from above) + 5 (given)

Total Stockholders’ Equity =$ 16.65 million