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ia: Stuxdient Questionx rses.aplia.com/af/servlet/quizictx-robert2-00398quiz action takeQuizquiz probGuid-ONAPC0A8010100000041cdaa100c00008 9. Evaluating free cash flows and return on invested capital You are an industry analyst for the telecom sector. You are analyzing financial reports from two companies: TT&T; Inc and Ph nez or 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 Phonez Corp. $96,000 $31,680 $599,040 249,600 11.88% TT&T; Inc. EBIT Depreciation Total operating capital Net investment in operating capital WACC $262,400 $1,152,000 $576,000 11 85% In your analysis, you want to look for several characteristics-one of them being the return on invested capitai (ROIC). Using the information available, complete the following statements: : The net operating profit after tax (NOPAT) for TTST Inc. is , whereas the NOPAT for Phonez Corp. is TT&T; inc. has a free cash flow of whereas, Phonez Corp, has a free cash flow of TT&T; Inc has a return on invested capital than PhoneZ Corp. has, Your inference from the analysis is that both firms are in a high-growth phase, and their growth will be profitable Considering your analysis, which of the following statements is true? ? If ROICS greater than the rate of return that investors require, which (WACC), then the firm is adding value the weighted average cost of capital O If ROIC is less than the rate of return that investors require, which is the weighted average cost of capital (WACC), then the firm is adding value

Solution

Net Operating Profit after Tax (NOPAT) = Earnings before interest and Tax (1-Tax rate)

TT&T Inc

PhoneZ Corp

Earnings before interest

262400

96000

Tax Rate

0.35

0.35

(1-Tax rate)

0.65

0.65

NOPAT

170560

62400

Free Cash Flow = NOPAT + Depreciation – Net investment in Operating capital

TT&T Inc

PhoneZ Corp

NOPAT

170560

62400

Depreciation

86592

31680

Net investment in Operating capital

576000

249600

Free Cash Flow

-318848

-155520

Return on invested capital (ROIC) = NOPAT / Invested Capital*100

TT&T Inc

PhoneZ Corp

NOPAT

170560

62400

Invested Capital

1152000

599040

Return on invested capital (ROIC)

14.81%

10.42%

ROIC is the return company generates and the WACC is the return that the investors expect from company. If ROIC is greater than WACC it will end up in Adding value to the firm .Hence the statement If ROIC is greater than WACC, Then the firm is adding value is the statement which is true.

	TT&T Inc	PhoneZ Corp
Earnings before interest	262400	96000
Tax Rate	0.35	0.35
(1-Tax rate)	0.65	0.65
NOPAT	170560	62400