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. (Data Attached)
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 do you
conclude from the statement of cash flows?
b. 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?
c. What is Computron’s free cash flow (FCF)? What are Computron’s “net
uses” of its FCF?
d. 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?
e. What is Computron's EVA? The cost of capital was 10% in both years.
f. Assume that a corporation has $200,000 of taxable income from operations.
What is the company's federal tax liability?
g. Assume that you are in the 25% marginal tax bracket and that you have
$50,000 to invest. You have narrowed your investment choices down to
municipal bonds yielding 7% or equally risky corporate bonds with a yield
of 10%. Which one should you choose and why? At what marginal tax rate
would you be indifferent?