Question

In 2019, Japanese electronic giant Sony Inc. had ¥ 16,5 million in operating income (EBIT). With the huge demand for their products, Sony experienced a net depreciation expense of ¥ 3,3 million coupled with an interest expense of ¥ 2,2 million. Being subject to strict Japanese corporate tax, its corporate income tax was 40%. Furthermore, to maintain their competitive advantage over their rival Samsung, they maintain ¥ 44 million in operating current assets and ¥ 15,4 million in operating current liabilities; Sony keeps ¥ 49,5 million in net fixed assets. It estimates that it has a post-tax cost of capital of 10%

Based on Sony’s only non-cash item being depreciation, calculate the following:
a. Sony’s net income after taxes (NEAT) for the year?
b. Sony’s Net Operating Profit After Taxes
(NOPAT)?
c. Sony’s net operating working capital (WC) and total net operating capital for the year?
d. If the Working Capital Ratio (WCR/sales) read 25% in 2019, what was Sony’s sales revenue?
e. If total net operating capital was ¥ 75 million for the previous year (2018), what was Sony’s Free Cash Flow (FCF) in 2019?

Answer 1

Net income after taxes for Sony in 2019 is calculated to be ¥8.58 million, while the Net Operating Profit After Taxes is ¥9.9 million. The net operating working capital is ¥28.6 million with total net operating capital amounting to ¥78.1 million. Taking the Working Capital Ratio into consideration, Sony's sales revenue is found to be ¥114.4 million and Free Cash Flow for the year is ¥10.1 million.

Step-by-step explanation:

To calculate Sony's net income after taxes (NEAT), we subtract interest expense and taxes from the operating income. The tax is calculated on the income before taxes (operating income minus interest expense).

• Net Income before Taxes = Operating Income - Interest Expense = ¥16.5 million - ¥2.2 million = ¥14.3 million
• Taxes = Net Income before Taxes * Tax Rate = ¥14.3 million * 40% = ¥5.72 million
• NEAT = Net Income before Taxes - Taxes = ¥14.3 million - ¥5.72 million = ¥8.58 million

To calculate Net Operating Profit After Taxes (NOPAT), we adjust the operating income for tax:

• NOPAT = Operating Income * (1 - Tax Rate) = ¥16.5 million * (1 - 40%) = ¥9.9 million

The calculation for net operating working capital (WC) is:

• WC = Operating Current Assets - Operating Current Liabilities = ¥44 million - ¥15.4 million = ¥28.6 million
• Total Net Operating Capital = Net Operating Working Capital + Net Fixed Assets = ¥28.6 million + ¥49.5 million = ¥78.1 million

For the Working Capital Ratio (WCR), we have:

• WCR = Net Operating Working Capital / Sales Revenue
• Sales Revenue = Net Operating Working Capital / WCR = ¥28.6 million / 25% = ¥114.4 million

Finally, Sony's Free Cash Flow (FCF) for 2019 is:

• FCF = NOPAT + Depreciation - Change in Total Net Operating Capital
• Change in Total Net Operating Capital = Total Net Operating Capital 2019 - Total Net Operating Capital 2018 = ¥78.1 million - ¥75 million
• FCF = ¥9.9 million + ¥3.3 million - (¥78.1 million - ¥75 million) = ¥10.1 million