7. Evaluating free cash flows and return on invested capital

You are an industry analyst for the telecom sector. You are analyzing financial reports from two companies: TT&T Inc. and PhoneZ Corp. Corporate tax for both firms 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

	TT&T Inc.	PhoneZ Corp.
EBIT	$152,500	$108,580
Depreciation	$61,000	$43,432
Total operating capital	$896,700	$699,670
Net investment in operating capital	$427,000	$225,700
WACC	8.84%	11.50%

In your analysis, you want to look for several characteristicsone of them being the return on invested capital (ROIC). Using the information available, complete the following statements:

	TT&T Inc. has a______________ free cash flow than PhoneZ Corp. does.
	The net operating profit after tax (NOPAT) for TT&T Inc. is______________ , whereas the NOPAT for PhoneZ Corp. is_________________ .
	TT&T Inc. has a return on invested capital of___________________- , whereas, PhoneZ Corp. has a return on invested capital of______________ .

Your inference from the analysis is that both firms are in a high-growth phase, and their growth will be profitable. Considering your analysis, which of the following statements is true?

If ROIC is greater than the rate of return that investors require, which is the weighted average cost of capital (WACC), then the firm is adding value.

If ROIC is less than the rate of return that investors require, which is the weighted average cost of capital (WACC), then the firm is adding value.