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		$	10,000
Operating costs excluding depreciation		10,520			8,630
Depreciation and amortization		440			390
Earnings before interest and taxes	$	1,040		$	980
Less interest		280			200
Pre-tax income	$	760		$	780
Taxes (25%)		190			195
Net income available to common stockholders	$	570		$	585
Common dividends	$	202		$	200

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

	2020			2019
Assets
Cash	$	650		$	600
Short-term investments		130			100
Accounts receivable		2,750			2,500
Inventories		1,950			1,800
Total current assets	$	5,480		$	5,000
Net plant and equipment		3,750			3,500
Total assets	$	9,230		$	8,500
Liabilities and Equity
Accounts payable	$	1,300		$	1,200
Accruals		650			600
Notes payable		190			100
Total current liabilities	$	2,140		$	1,900
Long-term debt		1,300			1,200
Total liabilities	$	3,440			3,100
Common stock		4,422			4,400
Retained earnings		1,368			1,000
Total common equity	$	5,790		$	5,400
Total liabilities and equity	$	9,230		$	8,500

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)

Compute the net operating profit after taxes (NOPAT) for 2020, using the equation as shown below

NOPAT = Earnings before interest and taxes*(1 – Tax rate)

              = $1,040*(1 – 0.25)

              = $780 million

Hence, the NOPAT is $780 million.   

(b)

Compute the net operating working capital (NOWC), using the equation as shown below:

Year 2019

NOWC = Cash + Accounts receivables + Inventories – Accounts payables – Notes payables – Accruals

             = $600 + $2,500 + $1,800 - $1,200 - $100 - $600

             = $3,000

Hence, the NOWC is $3,000 million.

Year 2020

NOWC = Cash + Accounts receivables + Inventories – Accounts payables – Notes payables – Accruals

             = $650 + $2,750 + $1,950 - $1,300 - $190 - $650

             = $3,210

Hence, the NOWC is $3,210 million.

(c)

Compute the total net operating capital (NOC), using the equation as shown below:

Year 2019:

NOC = NOWC + Net fixed assets

         = $3,000 + $3,500

         = $6,500

Hence, the NOC is $6,500 million.

Compute the total net operating capital (NOC), using the equation as shown below:

Year 2020:

NOC = NOWC + Net fixed assets

         = $3,210 + $3,750

         = $6,960

Hence, the NOC is $6,960 million.

(d)

Compute the free cash flow (FCF) for the year 2020, using the equation as shown below:

FCF = NOPAT + Depreciation – Change in NOC – Change in short term investment

        = $780 + $440 – ($6,960 - $6,500) – ($130 - $100)

       = $780 + $440 - $460 - $30

        = $730 million

Hence, the FCF for the year 2020 is $730 million.