managerial finance

 

Problem Set #2

Attached Files:

•  Financial Statements & Other Data.xlsx (18.764 KB)

‘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)

1. 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?
2. 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?
3. What is Computron’s free cash flow (FCF)? What are Computron’s “net uses” of its FCF?
4. 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?
5. What is Computron’s EVA?  The cost of capital was 10% in both years.
6. Assume that a corporation has $200,000 of taxable income from operations. What is the company’s federal tax liability?
7. 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?

Mini Case

)

40% 40%

2019 2020

$ 432,000

$ 276,000

$ 881,280 $ 1,731,955

2020

$0

$50,000

$75,000

$100,000

$335,000

34.0%

$10,000,000

$15,000,000

$18,333,333

35.0%

Computron’s Income Statement
	2019
		2020
INCOME STATEMENT
Net sales	$ 2,059,200	$ 3,500,640
Cost of Goods Sold (Except depr. and amort.)	$ 1,718,400	$ 2,988,000
Other Expenses	$ 204,000		$ 432,000
Depreciation and amortization	$ 11,340	$ 70,176
Total Operating Costs	$ 1,933,740	$ 3,490,176
Earnings before interest and taxes (EBIT)	$ 125,460	$ 10,464
Less interest	$ 37,500	$ 105,600
Pre-tax earnings	$ 87,960	$ (95,136)
Taxes (		40%	$ 35,184	$ (38,054)
Net Income	$ 52,776	$ (57,082)
Dividends	$ 13,200	$ 6,600
Tax rate
Computron’s Balance Sheets
Assets
Cash and equivalents	$ 5,400	$ 4,369
Short-term investments	$ 29,160	$ 12,000
Accounts receivable	$ 210,720	$ 379,296
Inventories	$ 429,120	$ 772,416
Total current assets	$ 674,400	$ 1,168,081
Gross fixed assets	$ 294,600	$ 721,770
Less: Accumulated depreciation	$ 87,720	$ 157,896
Net plant and equipment	$ 206,880	$ 563,874
Total assets		$ 881,280		$ 1,731,955
Liabilities and equity
Accounts payable	$ 87,360	$ 194,400
Notes payable	$ 120,000
Accruals	$ 81,600	$ 170,976
Total current liabilities	$ 288,960	$ 797,376
Long-term bonds	$ 194,059	$ 600,000
Common Stock		$ 276,000
Retained Earnings	$ 122,261	$ 58,579
Total Equity	$ 398,261	$ 334,579
Total Liabilites and Equity
Computron’s Statement of Cash Flows Bart Kreps: The statement of cash flows provides information about cash inflows and outflows during an accounting period.
Operating Activities
Net Income before preferred dividends	$ (57,081.60)
Noncash adjustments
Depreciation and amortization	$ 70,176.00
Due to changes in working capital
Change in accounts receivable	$ (168,576.00)
Change in inventories	$ (343,296.00)
Change in accounts payable	$ 107,040.00
Change in accruals	$ 89,376.00
Net cash provided by operating activities	$ (302,361.60)
Investing activities
Cash used to acquire fixed assets	$ (427,170.00)
Change in short-term investments	$ 17,160.00
Net cash provided by investing activities	$ (410,010.00)
Financing Activities
Change in notes payable	$ 312,000.00
Change in long-term debt	$ 405,940.80
Payment of cash dividends	$ (6,600.00)
Net cash provided by financing activities	$ 711,340.80
Net change in cash and equivilents	$ (1,030.80)
Cash and securities at beginning of the year	$ 5,400.00
Cash and securities at end of the year	$ 4,369.20
Corporate Tax Rates
If a corporation’s taxable income is between:	It pays this amount on the base of the bracket:	Plus this percentage on the excess over the base
(1)	(2)	(3)	(4)
	$0		$50,000	15.0%
	$75,000	$7,500	25.0%
	$100,000	$13,750		34.0%
	$335,000	$22,250	39.0%
	$10,000,000	$113,900
	$15,000,000	$3,400,000		35.0%
	$18,333,333	$5,150,000	38.0%
and up	$6,416,667