Question

Last year Miami Rivets had S6 million in operating income (EBIT). Its depreciation expense was $1 million, its interest expense was $1 min, and its corporate tax rate was 30%. At year-end, it had $15 million in current assts, $4 million in accounts payable, $1 million in accruals, $2 million in notes payable, and $16 million in net plant and equipment. Miami Rivets uses only debt and common equity to fund its operations. (In other words, Miami Rivets has no preferred stock on its balance sheet.) Miami Rivets had no other current liabilities. Assume that Miami Rivets's only noncash item was depreciation 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)? CWhat was its net working capital (NWC? D. Miami Rivets 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?

Answer 1

1)
A)	EBIT	6000000
	Interest	1000000
	EBT	5000000
	Tax at 30%	1500000
	Net income	3500000
B)	Current assets	15000000
	ess:
	Accounts payable	4000000
	Accruals	1000000
	Net operating working capital	10000000
C)	Net working capital = Current assets-Current liabilities = 15000000-4000000-1000000-2000000 =	8000000
D)	EBIT	6000000
	Tax at 30%	1800000
	NOPAT	4200000
	Add: Depreciation	1000000
	Operating cash flow	5200000
	Less:
	Net capital spending = Ending net plant and equipment-Beginning net plant and equipment+Depreciation expense = 16000000-12000000+1000000 =	5000000
	Change in NWC	0
	Free cash flow	200000
E)	Common stock		5000000
	Retained earnings ending balance:
	Beginning balance	11200000
	Net income for the year	3500000
	Dividends paid	-1200000
	Retained earnings ending balance		13500000
	EOY stockholders' balance		18500000
F)	MVA = MV of stock-BV of stockholders' equity
	= 50*500000-18500000 =	6500000
G)	EVA = NOPAT-Invested capital*WACC
	= NOPAT-(NOWC+NFA)*WACC = 4200000-(10000000+16000000)*9% =	1860000
2)	Tax table not given