Question

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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 $ 11,000 Operating costs excluding depreciation 10,588 9,746 Depreciation and amortization 380 330     Earnings before interest and taxes $ 1,032 $ 924 Less interest 160 100     Pre-tax income $ 872 $ 824 Taxes (25%) 218 206 Net income available to common stockholders $ 654 $ 618 Common dividends $ 201 $ 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 1,750 1,600     Total current assets $ 5,280 $ 4,800 Net plant and equipment 3,750 3,500 Total assets $ 9,030 $ 8,300 Liabilities and Equity Accounts payable $ 1,300 $ 1,200 Accruals 650 600 Notes payable 352 200     Total current liabilities $ 2,302 $ 2,000 Long-term debt 1,300 1,200     Total liabilities $ 3,602 3,200 Common stock 4,175 4,300 Retained earnings 1,253 800     Total common equity $ 5,428 $ 5,100 Total liabilities and equity $ 9,030 $ 8,300 Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions. 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 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 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 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 What is the ROIC for 2020? Round your answer to two decimal places.   % 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. 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. Answer: NOPAT = EBIT X (1-1) Hints: NOPAT EBIT = Net Operating Profit After Taxes = Earnings Before Interest And Taxes = Tax NOPAT = $1,032 X (1-25%) NOPAT = $774.00 Million b. 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. Answer: NOWC = Operating Current assets - Operating Current Liabilities Hints: NOWC = Net Operating Working Capital NOWC (2020) = (Cash +Account Receivable+Inventories) - (Account Paybale + Accruals) NOWC (2020) = ($650 + $2,750 + $1,750) – ($1,300 + $650) NOWC (2020) = $ 3,200 Million NOWC (2019) = (Cash +Account Receivable+Inventories) - (Account Paybale + Accruals) NOWC (2019) = ($600 + $2,500+ $1,600) - ($1,200 + $600) NOWC (2019) = $ 2,900 Million

c. What are the amounts of total net operating capital for both years? For example, an answer of $1 million should be entered as 1, not 1,000,000. Round your answers to the nearest whole number. Answer: Hints: NOC NOC = NOWC + Operating Long Term Assets = Net Operating Capital NOC (2020) = $3,200 + $3,750 NOC (2020) = $ 6,950 Million NOC (2019) = $2,900 + $3,500 NOC (2019) = $ 6,400 Million Id. 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. Round your answers to the nearest whole number. Answer: Hints: NOPAT Free cash flow = NOPAT - change in Operating Working Capital - New Investment in fixed assets = Net Operating Profit After Taxes Free cash flow = NOPAT – (NOWC 2020 – NOWC 2019) - ($3,750 - $3,500) NOWC = Net Operating Working Capital Free cash flow = $774 - ($3,200 - $2,900) – ($3,750 - $3,500) Free cash flow = $ 224.00 Million

e. What is the ROIC for 2020? Round your answer to two decimal places. Answer: ROIC = NOPAT / Total Net Operating Capital Hints: ROIC NOPAT = Return on Invested Capital = Net Operating Profit After Taxes ROIC = $774 / $6,950 ROIC = 11.14%

f. 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. Answer: Hints: $ $ After-tax interest payment Reduction (increase) in debt Payment of dividends Repurchase (Issue) stock Purchase (Sale) of short-term investments 120.00 252.00 201.00 125.00 30.00 $ $ Calculation- After Tax Interest Payment = Interest*(1-T) After Tax Interest Payment = $160*(1-25%) After Tax Interest Payment = $120.00 Million Increase in Debt = Increase in Note payable + Increase in LT Debt Increase in Debt = ($352 - $200) + ($1,300 - $1,200) Increase in Debt = $ 252.00 Million Repurchase of stock = $4,175 - $4,300 Repurchase of stock = $ 125.00 Million Purchase of ST Investment = $130 - $100 Purchase of ST Investment = $ 30.00 Million