9. 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: Talker Corp. and MobileTalk Inc. 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

	Talker Corp.	MobileTalk Inc.
EBIT	$331,500	$136,500
Depreciation	$116,025	$47,775
Total operating capital	$1,404,000	$583,050
Net investment in operating capital	$585,000	$253,500
WACC	12.28%	17.35%

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:

	The net operating profit after tax (NOPAT) for Talker Corp. is , whereas the NOPAT for MobileTalk Inc. is .
	Talker Corp. has a free cash flow of , whereas, MobileTalk Inc. has a free cash flow of .
	Talker Corp. has a return on invested capital than MobileTalk Inc. has.

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 less 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 greater than the rate of return that investors require, which is the weighted average cost of capital (WACC), then the firm is