MINI CASE
Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an
equities analyst, was recently brought in as assistant to the chairman of the board of
Computron Industries, a manufacturer of computer components.
During the previous year, Computron had doubled its plant capacity, opened new
sales offices outside its home territory, and launched an expensive advertising campaign.
Cochran was assigned to evaluate the impact of the changes. She began by gathering
financial statements and other data. Note: these are available in the file Ch02 Tool Kit.xlsx
in the Mini Case tab.
Balance Sheets
Assets 2015 2016
Cash $ 9,000 $ 7,282
Short-term investments. 48,600 20,000
Accounts receivable 351,200 632,160
1,468,800
Liabilities and equity 2014 2015
Accounts payable $ 145,600 $ 324,000
Notes payable 200,000 720,000
Accruals 136,000 284,960
1,468,800
Income Statements
2015 2016
Sales $ 3,432,000 $ 5,834,400
Cost of goods sold 2,864,000 4,980,000
Other expenses 340,000 720,000
Other data 2014 2015
Stock price $ 8.50 $ 6.00
Statement of Cash Flows
Operating activities
Net income $ (95,136)
Adjustments:
noncash adjustments:
depreciation 116,960
changes in working capital:
Investing activities
Cash used to acquire fixed assets $ (711,950)
Financing activities
change in notes payable $ 520,000
Summary
Net change in cash $ (1,718)
a. What effect did the expansion have on sales and net income? What effect did the
expansion have on the asset side of the balance sheet? What effect did it have on
liabilities and equity?
Answer: Sales increased by over by over $2.4 million, but net income fell by over $190,000.
b. What do you conclude from the statement of cash flows?
Answer: Net CF from operations = -$503,936, because of negative net income and increases in
c. What is free cash flow? Why is it important? What are the five uses of FCF?
Answer: FCF is the amount of cash available from operations for distribution to all investors
(including stockholders and debtholders) after making the necessary investments to
1. Pay interest on debt.
d. What is Computron’s net operating profit after taxes (NOPAT)? What are
operating current assets? What are operating current liabilities? How much net
operating working capital and total net operating capital does Computron have?
Answer: NOPAT = EBIT(1 – TAX RATE)
Current year:
Previous year:
Operating current assets are the CA needed to support operations. OP CA include:
NOWC = operating CA – operating CL
Current year:
Total operating working capital = NOWC + net fixed assets.
Current year:
e. What is Computron’s free cash flow (FCF)? What are Computron’s “net uses”
of its FCF?
Answer: FCF = NOPAT – Net investment in capital
= $10,464 – ($2,257,632 – $1,138,600)
Uses of FCF: 2015
After-tax interest payment = $105,600
Reduction (increase) in debt = −$1,196,568
f. Calculate Computron’s return on invested capital (ROIC). Computron has a
10% cost of capital (WACC). What caused the decline in the ROIC? Was it due
to operating profitability or capital utilization? Do you think Computron’s
growth added value?
ANSWER: ROIC = NOPAT / TOTAL NET OPERATING CAPITAL.
Current year:
Previous year:
Current year:
Previous year:
Current year:
Previous year:
The current ROIC of 0.5% dropped from 11% in the previous year. This decline was
due to worse operating profitability (0.18% versus 2.15%) and worse capital
g. Cochran also has asked you to estimate Computron’s EVA. She estimates that
the after-tax cost of capital was 10 percent in both years.
ANSWER: EVA = NOPAT- (WACC)(CAPITAL).
Current year:
EVA = $10,464 – (0.1)($2,257,632)
Previous year:
EVA = $125,460 – (0.10)($1,138,600)
h. What happened to Computron’s market value added (MVA)?
Answer: MVA = market value of the firm – book value of the firm.
Market value = (# shares of stock)(price per share) + value of debt.
i. Assume that a corporation has $100,000 of taxable income from operations plus
$5,000 of interest income and $10,000 of dividend income. What is the
company’s tax liability?
Answer: Calculation of the company’s tax liability:
Taxable operating income $100,000
taxable dividend income = dividends – exclusion
j. Assume that you are in the 25 percent marginal tax bracket and that you have
$5,000 to invest. You have narrowed your investment choices down to California
bonds with a yield of 7 percent or equally risky ExxonMobil bonds with a yield
of 10 percent. Which one should you choose and why? At what marginal tax
rate would you be indifferent to the choice between California and ExxonMobil
bonds?
Answer: After-tax return income at t = 25%:
ExxonMobil = 0.10($5,000) – (0.10)($5,000)(0.25) = $375.
t = 30%.