Last year Cole Furnaces had $5 million in operating income (EBIT). The companyhad a net depreciation expense of $1 million and an interest expense of $1 million; itscorporate tax rate was 40%. The company has $14 million in operating current assetsand $4 million in operating current liabilities; it has $15 million in net plant andequipment. It estimates that it has an after-tax cost of capital of 10%. Assume thatCole’s only noncash item was depreciation.a. What was the company’s net income for the year?b. What was the company’s net cash flow?c. What was the company’s net operating profit after taxes (NOPAT)?d. Calculate net operating working capital and total net operating capital for thecurrent year.e. If total net operating capital in the previous year was $24 million, what was thecompany’s free cash flow (FCF) for the year?f. What was the company’s Economic Value Added (EVA)?
Question
Last year Cole Furnaces had 1 million and an interest expense of 14 million in operating current assetsand 15 million in net plant andequipment. It estimates that it has an after-tax cost of capital of 10%. Assume thatCole’s only noncash item was depreciation.a. What was the company’s net income for the year?b. What was the company’s net cash flow?c. What was the company’s net operating profit after taxes (NOPAT)?d. Calculate net operating working capital and total net operating capital for thecurrent year.e. If total net operating capital in the previous year was $24 million, what was thecompany’s free cash flow (FCF) for the year?f. What was the company’s Economic Value Added (EVA)?
Solution
a. To calculate the net income, we first need to subtract the interest expense from the operating income (EBIT), then apply the corporate tax rate:
Operating income (EBIT) = 1 million Pre-tax income = 1 million = 4 million * 40% = 4 million - 2.4 million
b. Net cash flow is calculated by adding back the non-cash expense (depreciation) to the net income:
Net income = 1 million Net cash flow = Net income + Depreciation = 1 million = $3.4 million
c. Net operating profit after taxes (NOPAT) is the EBIT multiplied by (1 - Tax rate):
NOPAT = EBIT * (1 - Tax rate) = 3 million
d. Net operating working capital is calculated by subtracting operating current liabilities from operating current assets:
Operating current assets = 4 million Net operating working capital = Operating current assets - Operating current liabilities = 4 million = $10 million
Total net operating capital is the sum of net operating working capital and net plant and equipment:
Net plant and equipment = 10 million + 25 million
e. Free cash flow (FCF) is calculated by subtracting the total net operating capital of the previous year from the total net operating capital of the current year, then adding the NOPAT:
Total net operating capital (previous year) = 25 million NOPAT = 3 million + (25 million) = $2 million
f. Economic Value Added (EVA) is calculated by subtracting the total capital multiplied by the cost of capital from the NOPAT:
Cost of capital = 10% EVA = NOPAT - (Total net operating capital * Cost of capital) = 25 million * 10%) = 2.5 million = $0.5 million
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