Company A results last year; S = $25,700; CGS = $18,800; D = $3,450; I = $990. S

Question

Company A results last year; S = $25,700; CGS = $18,800; D = $3,450; I = $990. Start of last year, NF = $19,280, CA = $5,100, and CL = $3,400, End of prior year NF = $23,650, CA =$5,830 and CL =$3,580. TR =40%. no short term investments or NP

S = Sales CGS = Cost of goods sold D = depreciation expense

I = interest expense NF = net fixed assets CA = Current Assets

CL = current liabilities TR = tax rate NP = notes payable

a. Create Income Statement for Company A. Find net income for last year?

b. Find NOPAT for last year? What caused the difference between net income and NOPAT?

c. What was Return on Invested Capital?

d.   What was the free cash flow for last year? Is this possible? Explain.

Explanation / Answer

a.

b. NOPAT(Net Operating Profit After Tax = Operating Profit*(1-tax rate) = 3450*(1-0.4) = $2,070

NOPAT does not consider Interest Expense in it's calculation. It calcuates tax on operating income/EBIT. This cause difference between Net Income and NOPAT.

c. Invested Capital at beginning = 19280 + 5100 - 3400 = $20,980
Invested Capital at end = 23650 + 5830 - 3580 = $25,900
Average Invested Capital = (20980 + 25900)/2 = $23,440
Return on invested capital = Net income/Average Invested Capital*100 = 1476/23440*100 = 6.3%

d. Beginning Working Capital = 5100 - 3400 = $1,700
Ending Working Capital = 5830 - 3580 = $2,250
Change in WC = 2250 - 1700 = $550
Free Cash Flow = NOPAT + Depreciation - Change in Net working capital - Capital Expenditure = 2070 + 3450 - 550 - (23650 - 19280) = $600

Income Statement $ Sales        25,700 CoGS        18,800 Gross Profit           6,900 Depreciation           3,450 Operating Profit/EBIT           3,450 Interest Expense              990 Profit Before Tax           2,460 Tax Expense              984 Net Income           1,476

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