Change in net operating working capital formula

Prepare responses to Mini Cases for Chapters 2-3. Excel Toolkits are attached to assist you with the mini cases.

Chapter
Tool Kit Chapter 2 10/27/15
Financial Statements, Cash Flow, and Taxes
2-1 Financial Statements and Reports
The annual report contains a verbal section plus four key statements: the balance sheet, income statement, statement of stockholders' equity, and statement of cash flows.
Our spreadsheets use formulas rather than fixed numbers. For example, the cell for Total assets for the most recent year contains the Sum formula rather than just a fixed number. That way, if the data for any inputs (cash, for instance) change, the spreadsheet will automatically recalculate and provide the correct new value for Total assets.
In financial modeling, it is helpful to users when input data is grouped together, so you should follow this practice in your own models, too.
2-2 The Balance Sheet
INPUT DATA SECTION: Historical Data Used in the Analysis
2016 2015
Year-end common stock price $27.00 $40.00
Year-end shares outstanding (in millions) 50 50
Tax rate 40% 40%
Weighted average cost of captal (WACC) 11.0% 10.5%
Figure 2-1
MicroDrive Inc. December 31 Balance Sheets
(Millions of Dollars)
Assets 2016 2015
Cash and equivalents $ 50 $ 60
Short-term investments - 40
Accounts receivable 500 380
Inventories 1,000 820
Total current assets $ 1,550 $ 1,300
Net plant and equipment 2,000 1,700 Note: Net plant and equipment is equal to cumulative purchases of fixed assets less cumulative depreciation and cumulative disposed assets.
Total assets $ 3,550 $ 3,000
Liabilities and Equity
Accounts payable $ 200 $ 190
Notes payable 280 130
Accruals 300 280
Total current liabilities $ 780 $ 600
Long-term bonds 1,200 1,000
Total liabilities $ 1,980 $ 1,600
Preferred stock (1,000,000 shares) 100 100
Common stock (50,000,000 shares) 500 500
Retained earnings 970 800
Total common equity $ 1,470 $ 1,300
Total liabilities and equity $ 3,550 $ 3,000
2-2 The Income Statement
Figure 2-2
MicroDrive Income Statements for Years Ending December 31
(Millions of Dollars, Except for Per Share Data)
2016 2015
Net sales $ 5,000 $ 4,760
Costs of goods sold except depreciation 3,800 3,560
Depreciation and amortizationa 200 170
Other operating expenses 500 480
Earnings before interest and taxes (EBIT) $ 500 $ 550
Less interest 120 100
Pre-tax earnings $ 380 $ 450
Taxes 152 180
Net Income before preferred dividends $ 228 $ 270
Preferred dividends 8 8
Net Income available to common stockholders $ 220 $ 262
Additional Information
Common dividends $50 $48
Addition to retained earnings $170 $214
Number of common shares 50 50
Stock price per share $27 $40
Per Share Data
Earnings per share, EPSb $4.40 $5.24
Dividends per share, DPSc $1.00 $0.96
Book value per share, BVPSd $29.40 $26.00
Notes:
a MicroDrive has no amortization charges.
b EPS = Net income available to common stockholders Common shares outstanding
c DPS = Dividends paid to common stockholders Common shares outstanding
d BVPS = Total common equity Common shares outstanding
2-4 Statement of Stockholders’ Equity
The statement of stockholders' equity takes the previous year's balance of common stock, retained earnings, and stockholders' equity and then adds the current year's net income and subtracts dividends paid to common stockholders. The end result is the new balance of common stock, retained earnings, and stockholders' equity.
Figure 2-3
MicroDrive Inc. Statement of Stockholders' Equity
(Millions of Dollars, Millions of Shares)
Preferred Stock Common Shares Common Stock Retained Earnings Total Equity
Balances, Dec. 31, 2015 $100 50 $500 $800 $1,400
Changes during year:
Net income $220 $220
Cash dividends (50) (50)
Issuance/repurchase of stock 0 0 0
Balances, Dec. 31, 2016 $100 50 $500 $970 $1,570
Note: In financial statements, parentheses and red colors denote a negative number.
2-5 Statement of Cash Flows
Information from the balance sheet and income statement can be used to construct the Statement of Cash Flows, which is shown below for MicroDrive, in millions of dollars.
Figure 2-4
MicroDrive Statement of Cash Flows for Year Ending Dec. 31
(Millions of Dollars)
Operating Activities 2016
Net Income before preferred dividends $ 228
Noncash adjustments
Depreciationa 200
Working capital adjustments
Increase in accounts receivableb (120)
Increase in inventories (180)
Increase in accounts payable 10
Increase in accruals 20
Net cash provided (used) by operating activities $ 158
Investing Activities
Cash used to acquire fixed assetsc $ (500)
Sale of short-term investments 40
Net cash provided (used) by investing activities $ (460)
Financing Activities
Increase in notes payable $ 150
Increase in bonds 200
Payment of common and preferred dividends (58)
Net cash provided (used) by financing activities $ 292
Summary
Net change in cash and equivalents $ (10)
Cash and securities at beginning of the year 60
Cash and securities at end of the year $ 50
Notes:
aDepreciation is a noncash expense that was deducted when calculating net income. It must be added back to show the correct cash flow from operations.
bAn increase in a current asset decreases cash. An increase in a current liability increases cash. For example, inventories increased by $180 million and therefore reduced cash by the same amount.
cThe net increase in fixed assets is $300 million; however, this net amount is after a deduction for the year’s depreciation expense. Depreciation expense must be added back to find the increase in gross fixed assets. From the company’s income statement, we see that the year's depreciation expense is $200 million; thus, expenditures on fixed assets were actually $500 million.
2-6 Net Cash Flow
2016 2015
Net income $220.0 $262.0
Depreciation $500.0 $480.0
Net cash flow $720.0 $742.0
2-7 Free Cash Flow: The Cash Flow Available for Distribution to Investors
Net Operating Profit After Taxes
NOPAT is the amount of profit MicroDrive would generate if it had no debt and held no financial assets.
NOPAT = EBIT x (1-T)
2016 2015
Tax rate 40% 40%
Earnings before interest and taxes (EBIT) $500 $550
x (1-T) 60% 60%
NOPAT $300 $330
Net Operating Working Capital
The current assets (CA) used in operations are called operating current assets. Operating CA include the cash needed for operations, accounts receivable and inventories. The current liabilities (CL) that are due to operations are called operating current liabilities. Operating CL include accounts payable and accruals. Net operating working capital (NOWC) is equal to operating CA minus operating CL. NOWC is the net amount that a company's operations tie up in current assets and current liabilities.
Calculating Operating Current Assets
2016 2015
Cash and equivalents $50 $60
+ Accounts receivable $500 $380
+Inventories $1,000 $820
Operating current assets $1,550 $1,260
Calculating Operating Current Liabilities
2016 2015
Accounts payable $200 $190
+ Accruals $300 $280
Operating current liabilities $500 $470
Calculating Net Operating Working Capital
2016 2015
Operating current assets $1,550 $1,260
− Operating current liabilities $500 $470
Net operating working capital $1,050 $790
Total Net Operating Capital (also just called Operating Capital or just Capital)
The Total Net Operating Capital is Net Operating Working Capital plus any long-term fixed assets or net plant, property, and equipment used in operations.
Calculating Total Net Operating Capital
2016 2015
Net operating working capital $1,050 $790
+ Net plant and equipment $2,000 $1,700
Total net operating capital $3,050 $2,490
Alternative Calculation of Total Net Operating Capital (also just called Operating Capital)
Total Funds Provided by Investors