You are an industry analyst for the telecom sector. You are analyzing financial

Question

You are an industry analyst for the telecom sector. You are analyzing financial reports from two companies: TT&T; Inc. and PhoneZ Corp. Corporate tax for both firms is 35%. Your associate analyst has calculated and compiled, in the following table, a list of important figures you need for the analysis: Data Collected EBIT Depreciation Total operating capital Net investment in operating capital WACC TT&T; Inc $196,800 $64,944 $864,000 $432,000 11.85% Phonez Corp $72,000 $23,760 $449,280 $187,200 11.88% In your analysis, you want to look for several characteristics-one of them being the return on invested capital (ROIC). Using the information available, complete the following statements: TT&T; Inc. has a free cash flow than PhoneZ Corp. doe:s , whereas the NOPAT The net operating profit after tax (NOPAT) for TT&T; Inc. is for Phonez Corp. is TT&T; Inc. has a return on invested capital of , whereas, Phonez Corp. has a return on invested capital of

Explanation / Answer

FCF = EBIT x (1 - tax) + Depreciation - Capital requirement

For TT&T, FCF = 196,800 x (1 - 35%) + 64,944 - 432,000 = -239,136

For PhoneZ, FCF = 72,000 x (1 - 35%) + 23,760 - 187,200 = -116,640

Hence, TT&T has lower FCF than PhoneZ

NOPAT for TT&T = EBIT x (1 - tax) = 196,800 x (1 - 35%) = 127,920

for PhoneZ = 72,000 x (1 - 35%) = 46,800

ROIC = NOPAT / Operating asset

For TT&T, ROIC = 127,920 / 864,000 = 14.81%

For PhoneZ, ROIC = 46,800 / 449,280 = 10.42%

The second statement is correct. Value addition is when ROIC > WACC

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.