MIRANDA,SHARMAINE C.

BSA-3A
QUESTION 1
Shown above are the income statement and balance sheet for HealthCo, a $600 million health-
care company. Compute NOPLAT, average invested capital, and ROIC for the current year and
future year. Assume an operating tax rate of 30 percent. If the weighted average cost of capital is
10 percent, is the company creating value? In which year is the firm performing better? Why? Do
it in Microsoft Excel and upload it here.

Income Statement
Particulars Last year Current year Next year

EBIT (less capital loss) 132 111 157

Net Income 82 67 99

NOPLAT= (EBIT*(1-tax) 92.4 77.7 109.9

Invested Capital= Debt (short term + long term) + Share holders fund
Particulars Last year Current year Next year
Short term debt 90 90 90 The firm seems to be perfo
Long term debt 210 210 210 because ROIC is the highest i
A. Total Debt 300 300 300 due to the fact that the revenue
is also higher. Moreover, in the
Common Stock 100 100 100 a capital loss of $10,000,000 w
Retained Earnings 313 353 413
B. Share Holders Fund 413 453 513

713 753 813

Invested Capital (A+B)
Therefore, Average capital = [(last
year capital + current year 733 783
capital)/2]
ROIC= NOPLAT/Invested Capital 12.96% 10.32% 13.52%
lion health-
nt year and
of capital is
? Why? Do

m seems to be performing better in the next year

e ROIC is the highest in the next year. This is mainly
he fact that the revenues have increased, and the EBIT
higher. Moreover, in the current year, the company has
l loss of $10,000,000 which further reduces the returns.
MIRANDA, SHARMAINE C.
BSA-3A

QUESTION 2
Using the reorganized financial statements created in Question 1, what is the free cash flow for
HealthCo in the current year and next year? Show your answer and computations in Microsoft
Excel.

Calculating Free Cash Flows Calculation of working capital

Particulars Current year Next year Particular Last year

NOPLAT 77.7 109.9 Current Assets 663

Add: Depreciation 36 39 Current Liabilities 530

Less: Capital Net working capital=
44 39 133
Expense (CA-CL)
Investment in WC=
Less: Investment
-4 21 current year- previous
in working capital
year
Free cash flow to
73.7 88.9
the firm (FCFF)
e cash flow for
ns in Microsoft

on of working capital Calculation of Capital Expenditure

Current year Next year Particulars Last year Current year

703 763 Long term assets (PPE) 440 484

Capital expense (current

574 613 44
year- last year)
129 150

-4 21
enditure
Next year

523

39
MIRANDA, SHARMAINE C.
BSA-3A

QUESTION 3
Many companies hold significant amounts of excess cash, or cash above the amount required
for day-to-day operations. What would happen to the ROIC for HealthCo if you included excess
cash in its calculation? Why should one exclude excess cash from the calculation?

Invested capital
713 753 813
(A+B)
It shows that if we include excess cash into co
Add: Excess cash 91 74 83 Capital invested in the business increases for th
from our calculations because this is not being
New invested capital 804 827 896 are not being re-invested in the firm and hence w
ROIC= NOPLAT/ kept ideal and not utilized. These funds are o
11.49% 9.40% 12.27% protection for a rainy day.
Invested capital
mount required
included excess
on?

e include excess cash into consideration, the ROIC fall which is because the
n the business increases for the same return. We should exclude excess cash
ons because this is not being utilized by the firm in its operations that is they
vested in the firm and hence won’t be generating returns on them as they are
t utilized. These funds are only kept to maintain firm’s liquidity or act as a
ny day.