Question

Last year Cole Furnaces had $4 million in operating income (EBIT). The company had a net depreciation expense of $1 million and an interest expense of $1 million; its com-bined federal and state corporate tax rate is 25%. The company has $14 million in operat-ing current assets and $4 million in operating current liabilities; it has $15 million in net plant and equipment. It estimates that it has an after-tax cost of capital of 10%. Assume that Cole’s only noncash item was depreciation.

a. What was the company’s net income for the year?

b. What was the company’s net cash flow?

c. What was the company’s net operating profit after taxes (NOPAT)?

d. Calculate net operating working capital and total net operating capital for the current year

Answer 1

	a)	Calculation of Net Income:	Million ($)
		Earnings before Interest & Tax (EBIT)	4
	Less:	Interest expense	1
		Earnings before Tax (EBT)	3
	Less:	Taxes @ 25% - (3*25%)	0.75
		Net Income (after Tax)	2.25
	b)	Calculation of Net Cash Flow:
		Net Income (after Tax)	2.25
	Add:	Depreciation	1
		Net Cash Flow	3.25
	c)	Calculation of NOPAT:
		Earnings before Interest & Tax (EBIT)	4
	Less:	Taxes @ 25% - (4*25%)	1
		NOPAT	3
	d)	Calculation of Net operating working capital:
		Operating current assets	14
	Less:	Operating current liabilities	4
		Net operating working capital	10
		Calculation of total net operating capital:
		Net operating working capital	10
	Add:	Net plant & equipment	15
		Total net operating capital:	25