ASSIGNMENT 2

1. Define each of the following terms:

a) Annual report; balance sheet; income statement
b) Common stockholders’ equity, or net worth; retained earnings
c) Statement of stockholders’ equity; statement of cash flows
d) Depreciation; amortization; EBITDA
e) Operating current assets; operating current liabilities; net operating working capital; total net
operating capital
f) Accounting profit; net cash flow; NOPAT; free cash flow
g) Market Value Added; Economic Value Added
h) Progressive tax; taxable income; marginal and average tax rates
i) Capital gain or loss; tax loss carryback and carryforward
j) Improper accumulation; S corporation

2. What four statements are contained in most annual reports?

3. Explain the difference between NOPAT and net income. Which is a better measure of the
performance of a company’s operations?

4. What is free cash flow? Why is it the most important measure of cash flow?

5. If you were starting a business, what tax considerations might cause you to prefer to set it up as a
proprietorship or a partnership rather than as a corporation?

6. Last year Cole Furnaces had $5 million in operating income (EBIT). The company had a net
depreciation expense of $1 million and an interest expense of $1 million; its corporate tax rate
was 40%. The company has $14 million in operating current assets and $4 million in operating
current liabilities; it has $15 million in net plant and equipment. It estimates that it has an after-
tax cost of capital of 10%. Assume that Cole’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 the current year.
e) If total net operating capital in the previous year was $24 million, what was the company’s free
cash flow (FCF) for the year?
f) What was the company’s Economic Value Added (EVA)?

7. Little Books Inc. recently reported $3 million of net income. Its EBIT was $6 million, and its tax
rate was 40%. What was its interest expense? (Hint: Write out the headings for an income
statement and then fill in the known values. Then divide $3 million net income by 1 − T = 0.6 to
find the pre-tax income. The difference between EBIT and taxable income must be the interest
expense.

8. Pearson Brothers recently reported an EBITDA of $7.5 million and net income of $1.8 million. It
had $2.0 million of interest expense, and its corporate tax rate was 40%. What was its charge for
depreciation and amortization?

9. The Moore Corporation has operating income (EBIT) of $750,000. The company’s depreciation
expense is $200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the
company’s net income? What is its net cash flow?
10. Using Rhodes Corporation’s financial statements (shown below), answer the following questions.
a) What is the net operating profit after taxes (NOPAT) for 2010? What are the amounts of net
operating working capital for both years?
b) What are the amounts of total net operating capital for both years?
c) What is the free cash flow for 2010?
d) What is the ROIC for 2010?
e) How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net
debt repayments, dividends, net stock repurchases, and net purchases of short-term investments?
(Hint: Remember that a net use can be negative.)
Instructions:
a. Answer this question in groups with word & ppt format.
b. Choose your own team leader who’s responsible to the assignments submission and the
excellence of the content of the assignments and the presentation (slides and the ability of
presenting the assignments) in class.
c. Submit this assignment via email by only the team leader group to: ika.pratiwi@president.ac.id
d. Subject email: ex: Group 1 Assignment 1; Group 2 Assignment 1; etc.
e. Submit deadline: Day minus 1 (one) before the class begin at 11.59 p.m.
f. Each groups have to make hard copy. Don’t forget bring your flash disk for your presentation in
ppt.
g. The maximum time of presentation and Q&A for each group: 30 minutes.

Thank you and good luck!