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A B C D E F G H
10/28/2015
Situation
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.
Chapter 2 Mini Case
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2015 2016
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A B C D E F G H
Computron’s Income Statement
2015 2016
INCOME STATEMENT
Net sales 3,432,000$ 5,834,400$
Cost of Goods Sold Except Depr. 2,864,000 4,980,000
Depreciation and amortization 18,900 116,960
Total Operating Costs 3,222,900$ 5,816,960$
Tax rate 40% 40%
Cash and equivalents 9,000$ 7,282$
Short-term investments 48,600 20,000
Accounts receivable 351,200 632,160
Inventories 715,200 1,287,360
Total current assets 1,124,000$ 1,946,802$
Accounts payable 145,600$ 324,000$
Notes payable 200,000 720,000
Accruals 136,000 284,960
Total current liabilities 481,600$ 1,328,960$
Long-term bonds 323,432$ 1,000,000$
Computron’s Statement of Cash Flows
Change in accounts receivable (280,960)
a. (1.) What effect did the expansion have on sales and net income? Answer: See Mini Case Show.
a. (2.) What effect did the expansion have on the asset side of the balance sheet? Answer: See Mini Case Show
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A B C D E F G H
Change in accruals 148,960
Net cash provided by operating activities (503,936)$
Investing activities
Cash used to acquire fixed assets (711,950)$
Change in short-term investments 28,600
Net cash provided by financing activities 1,185,568$
Net change in cash and equivilents (1,718)$
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= $10,464.0 $2,257,632
= 0.5%
The Return on Invested Capital tells us the amount of NOPAT per dollar of operating capital.
= $125,460.0 $1,138,600
= 11.0%
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= 0.18%
OP = NOPAT ÷ Sales
= $125,460.0 $5,834,400
= 2.15%
= $2,257,632.0 $5,834,400
A B C D E F G H
= $2,257,632
2015 TOC = NOWC + Fixed assets
= $793,800 +$344,800
= $1,138,600
2016 FCF = NOPAT –Net Investment in Operating Capital
= $10,464.0 –$1,119,032
= -$1,108,568
Operating Profitability
2016
OP = NOPAT ÷ Sales
= $10,464.0 $5,834,400
f. Calculate Computron’s return on invested capital. Computron has a % cost of capital WACC. Do you think Computron’s
The operating profitability (OP) ratio shows how many dollars of operating profit are generated by each dollar of sales.
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A B C D E F G H
= 38.7%
2015
CR = Total Op. Cap. ÷ Sales
= $1,138,600.0 $5,834,400
= 19.5%
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California = $350.00
Muni Yield = Corp Yield *(1-Tax rate)
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A B C D E F G H
(1) (2) (3) (4)
$0 $50,000 $0 15.0%
$50,000 $75,000 $7,500 25.0%
$75,000 $100,000 $13,750 34.0%
$100,000 $335,000 $22,250 39.0%
$335,000 $10,000,000 $113,900 34.0%
$10,000,000 $15,000,000 $3,400,000 35.0%
$15,000,000 $18,333,333 $5,150,000 38.0%
$18,333,333 and up $6,416,667 35.0%
Base amount of tax 22,250$
Marginal tax rate in bracket 39.0%
Income above base of bracket 8,000$
Tax on income above base 3,120$
Total tax liability: $25,370
Taxable vs. Tax Exempt bonds
ExxonMobil = –Yield * (Investment) * (Tax Rate)
ExxonMobil = $375.00
California = –0
Tax Rate = 30.00%
Yield * (Investment)
Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and
ExxonMobil bonds?
Yield * (Investment)
percentage
on the excess
over the base
If a corporation’s taxable
income is between: