Question

J&H Corp. recently hired Jeffery. His immediate mandate was to analyze the company. He has to submit a report on the company's operational efficiency and estimate its potential investment in working capital. He has the income statement from last year and the following information from the company's financial reports as well as some industry averages. • Last year, J&H Corp. reported a book value of $300,000 in current assets, of which 30% is cash, 32% is short-term investments, and the rest is accounts receivable and inventory. The company reported $255,000 of current liabilities including accounts payable and accruals. Interestingly, the company had no notes payable outstanding, and there were no changes in the company's accounts payable during the year. The company, however, invested heavily in plant and equipment to support its operations. It reported a book value of $480,000 for its long-term assets last year. Income Statement For the Year Ended on December 31 Industry Average Net sales Operating costs, except depreciation and amortization Depreciation and amortization Total operating costs Operating income (or EBIT) Less: Interest expense Earnings before taxes (EBT) Less: Taxes (40%) Net income J&H Corp. $21,000,000 16,800,000 840,000 17,640,000 $3,360,000 336,000 $3,024,000 1,209,600 $1,814,400 $26,250,000 21,000,000 1,050,000 22,050,000 $4,200,000 630,000 $3,570,000 1,428,000 $2,142,000

Answer 1

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Answer (1):

NOPAT is given by the formula =>EBIT (1-T)

=> NOPAT = $3,360,000 (0.6) = $2,016,000 which is less than the industry average.

Answer (2):

68% of Total Assets => $204,000

No notes payable, So 100% of Total Liabilities =>$255,000

Answer (3):

Non cash changes include depriciation & Amortization which is $840,000

Cashflows = NOPAT + Deprication - Working Capital changes - CapeX

=>$2,016,000 + $840,000 = $2,856,000

Answer (4):

Net operating capital is the sum of both net operating working capital and investments in long assets

=> NOC = NOC Assets - NOC Liabilities  + Property & Equipment

=> $204,000 - $255,000 + $480,000 = $429,000