You are an industry analyst in the telecommunications sector.You are analyzing financial reports for two companies: Talker
Question:
You are an industry analyst in the telecommunications sector. You are analyzing financial reports for two companies: Talker Corp. and MobileTalk Inc. The corporate tax for both companies 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
Talker Corp. | Mobile Talk Inc. | |
EBIT | $164,000 | $60,000 |
Depreciation | $54,120 | $19,800 |
Total operating capital | $720,000 | $374,400 |
Net investment in operating capital | $360,000 | $156,000 |
WACC | 11,85% | 11,88% |
In your analysis, you want to look for several characteristics, one of them is return on invested capital (ROIC). Using the information available, complete the following statements:
• | Talker Corp.'s net operating income after tax (NOPAT) is $ , while the NOPAT for Mobile Talk Inc. is $ . |
• | Talker Corp. has free cash flow of , while MobileTalk Inc. has free cash flow of |
• | Talker Corp. has a return on invested capital than MobileTalk Inc. |
Their inference from the analysis is that both companies are in a high growth phase and their growth will be profitable. Given his analysis, which of the following statements is true?
A) If a company has a negative NOPAT but positive free cash flow, then the company could be in a high growth phase and making investments in working capital to support growth.
B If a company has a positive NOPAT but negative free cash flow, then the company could be in a high growth phase and making investments in working capital to support growth.
Auditing A Risk Based Approach to Conducting a Quality Audit
ISBN: 978-1305080577
10th edition
Authors: Karla Johnstone, Audrey Gramling, Larry E. Rittenberg