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Free Cash Flows Rhodes Corporation's financial statements are shown below
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 $13,000 $11,000
Operating costs excluding depreciation 11,522 9,688
Depreciation and amortization 350 320
Earnings before interest and taxes $1,128 $992
Less interest 120 100
Pre-tax income $1,008 $892
Taxes (25%) 252 223
Net income available to common stockholders$756 $669
Common dividends $203 $200
Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)
2020 2019
Assets
Cash $450 $400
Short-term investments 220 200
Accounts receivable 2,750 1,300
Total current assets $4,970 $4,400
Net plant and equipment 3,850 3,500
Total assets $8,820 $7,900
Liabilities and Equity
Accounts payable $900 $800
Accruals 450 400
Notes payable 186 100
Total current liabilities $1,536 $1,300
Long-term debt 900 800
Total liabilities $2,436 2,100
Common stock 4,931 4,900
Retained earnings 1,453 900
Total common equity $6,384 $5,800
Total liabilities and equity $8,820 $7,900
Suppose the federal-plus-state tax corporate tax is 25%.
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.
Expert Solution
Computation of Free Cash Flow (FCFF) to the firm 2020:
Free Cash Flow (FCFF) = Net Operating Profit after Tax - Change in Total Net Operating Capital
= $1,128*(1-25%) + ($7250-$6500)
= $846 - $750
Free Cash Flow (FCFF) = $96 million
Workings:
Net Operating Working Capital = Operating Current Assets - Operating current liabilities
Operating Current Assets = Total Current Assets - Short Term Investments
Operating Current Liabiliities = Total Current Liabilities - Notes payable
Net Operating Working Capital for 2020 = (4970-220) - (1536-186) = $3400 Million
Net Operating Working Capital for 2019 = (4400-200) - (1300-100) = $3000 Million
Net Operating Capital = Net Operating Working Capital + Operating Long Term Assets
Operating Long Term Assets = Net Plant and Equipment
Net Operating Capital for 2020 = 3400+3850 = $7250 Million
Net Operating Capital for 2019 = 3000+3500 = $6500 Million
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