2/1/2012

Chapter 7. Student Ch 07-15 Build a Model

a. Using the financial statements shown below, calculate net operating working capital, total net
operating capital, net operating profit after taxes, free cash flow, and return on invested capital for
the most recent year.

Lan & Chen Technologies: Income Statements for Year Ending December 31
(Thousands of Dollars) 2012 2011
Sales $945,000 $900,000
Expenses excluding depreciation and amortization 812,700 774,000
EBITDA $132,300 $126,000
Depreciation and amortization 33,100 31,500
EBIT $99,200 $94,500
Interest Expense 10,470 8,600
EBT $88,730 $85,900
Taxes (40%) 35,492 34,360
Net income $53,238 $51,540

Common dividends $43,300 $41,230

Addition to retained earnings $9,938 $10,310

Lan & Chen Technologies: December 31 Balance Sheets

(Thousands of Dollars)
Assets 2012 2011
Cash and cash equivalents $47,250 $45,000
Short-term investments 3,800 3,600
Accounts Receivable 283,500 270,000
Inventories 141,750 135,000
Total current assets $476,300 $453,600
Net fixed assets 330,750 315,000
Total assets $807,050 $768,600

Liabilities and equity

Accounts payable $94,500 $90,000
Accruals 47,250 45,000
Notes payable 26,262 9,000
Total current liabilities $168,012 $144,000
Long-term debt 94,500 90,000
Total liabilities $262,512 $234,000
Common stock 444,600 444,600
Retained Earnings 99,938 90,000
Total common equity $544,538 $534,600
Total liabilities and equity $807,050 $768,600

Key Input Data

Tax rate 40%

Net operating working capital

 Operating Operating
2012 NOWC = current assets - current liabilities
2012 NOWC = $472,500 - $141,750
2012 NOWC = $330,750

Operating Operating
2011 NOWC = current assets - current liabilities
2011 NOWC = $450,000 - $135,000
2011 NOWC = $315,000

Total net operating capital

2012 TOC = NOWC + Fixed assets
2012 TOC = $330,750 + $330,750
2012 TOC = $661,500

2011 TOC = NOWC + Fixed assets

2011 TOC = $315,000 + $315,000
2011 TOC = $630,000

Investment in total net operating capital

2012 2011
2012 Inv. In TOC = TOC - TOC
2012 Inv. In TOC = $661,500 - $630,000
2012 Inv. In TOC = $31,500

Net operating profit after taxes

2012 NOPAT = EBIT x (1-T)
2012 NOPAT = $99,200 x 60%
2012 NOPAT = $59,520

Free cash flow

2012 FCF = NOPAT - Net investment in operating capital
2012 FCF = $59,520 - $31,500
2012 FCF = $28,020

Return on invested capital

2012 ROIC = NOPAT / Total net operating capital
2012 ROIC = $59,520 / $661,500
2012 ROIC = 9.0%
b. Assume that there were 15 million shares outstanding at the end of the year, the year-end closing
stock price was $65 per share, and the after-tax cost of capital was 8%. Calculate EVA and MVA for
the most recent year.

Additional Input Data

Stock price per share $65.00
# of shares (in thousands) 15,000
After-tax cost of capital 8.0%
Market Value Added
MVA = Stock price x # of shares - Total common equity
MVA = $65.00 x 15,000 - $544,538
MVA = $975,000 - $544,538
MVA = $430,462

Economic Value Added

EVA = NOPAT - (Operating Capital x After-tax cost of capital)
EVA = $59,520 - $661,500 x 8%
EVA = $59,520 - $52,920
EVA = $6,600