Using Rhodes Corporation financial statements (shown below), answer the followin
ID: 2813090 • Letter: U
Question
Using Rhodes Corporation financial statements (shown below), answer the following questions.
a. What is the net operating profit after taxes (NOPAT) for 2016?
b. What are the amounts of net operating working capital for both years?
c. What are the amounts of total net operating capital for both years?
d. What is the free cash flow for 2016?
e. What is the ROIC for 2016?
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? (Remember that a net use can be negative)
Rhodes Corporation: Income Statement for Year Ending December 31 (Millions of Dollars)
2016 2015
Sales $11,000 $10,000
Operating costs excluding depreciation 9,360 8,500
Depreciation and amortization 380 360
Earnings before interest and taxes $1,260 $1,140
Less interest 120 100
Earnings before taxes $1,140 $1,040
Taxes (40%) 456 416
Net income available to common shareholders 684 624
Common dividends $220 $200
Rhodes Corporation: Balance Sheet as of December 31 (Millions of Dollars)
2016 2015
Assets $550 $500
Cash 110 100
Short term investments 2,750 2,500
Accounts receivable 1,650 1,500
Inventories $5,060 $4,600
Total current assets 3,850 3,500
Total assets $8,910 $8,100
Liabilities and Equity
Accounts payable $1,100 $1,000
Accruals 550 500
Notes payable 384 200
Total current liabilities $2,034 $1,700
Long-term debt 1,100 1,000
Total liabilities $3,134 $2,700
Common stock 4,312 4,400
Retained earnings 1,464 1,000
Total common equity $5,776 $5,400
Total liabilities and equity $8,910 $8,100
Explanation / Answer
Answer to Part a.
Net Operating Profit after Taxes (NOPAT) = EBIT * (1 – Tax Rate)
Net Operating Profit after Taxes (NOPAT) = $1,260 * (1 – 0.40)
Net Operating Profit after Taxes (NOPAT) = $756
Answer to Part b.
Net Operating Working Capital = Operating Assets – Operating Liabilities
Operating Assets = Cash + Accounts Receivable + Inventories
Operating Liabilities = Accounts Payable + Accruals
Year 2015:
Operating Assets = $500 + $2,500 + $1,500
Operating Assets = $4,500
Operating Liabilities = $1,000 + $500
Operating Liabilities = $1,500
Net Operating Working Capital = $4,500 - $1,500
Net Operating Working Capital = $3,000
Year 2016:
Operating Assets = $550 + $2,750 + $1,650
Operating Assets = $4,950
Operating Liabilities = $1,100 + $550
Operating Liabilities = $1,650
Net Operating Working Capital = $4,950 - $1,650
Net Operating Working Capital = $3,300
Answer to Part c.
Total Net Operating Capital = Net Operating Working Capital + Net Plant and Equipment
Year 2015:
Total Net Operating Capital = $3,000 + $3,500
Total Net Operating Capital = $6,500
Year 2016:
Total Net Operating Capital = $3,300 + $3,850
Total Net Operating Capital = $7,150
Answer to Part d.
Free Cash Flow = NOPAT – Investment in Total Net Operating Capital
Investment in Total Net Operating Capital = Total Net Operating Capital, 2016 - Total Net Operating Capital, 2015
Investment in Total Net Operating Capital = $7,150 - $6,500
Investment in Total Net Operating Capital = $650
Free Cash Flow = $756 - $650
Free Cash Flow = $106
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