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.

Assume that you are Cochran?s assistant and that you must help her answer the following questions:

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?

b. What do you conclude from the statement of cash flows?

c. What is free cash flow? Why is it important? What are FCF?s five uses?

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?

e. What is Computron?s free cash flow? What are Computron?s ?net uses? of its FCF?

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?

g. Cochran also has asked you to estimate Computron?s Economic Value Added (EVA). She estimates that the after-tax cost of capital was 10% in both years.

h. What happened to Computron?s Market Value Added (MVA)?

i. The Tax Cut and Jobs Act (TCJA) was signed into law in 2017. Briefly describe its key provisions for corporate taxes.

j. Assume that a corporation has $87 million of taxable income from operations. It also received interest income of $8 million and dividend income of $10 million. The federal tax rate is 21%, and the dividend exclusion rate is 50%. What is its taxable income and federal tax liability?

k. Briefly describe the TCJA?s key provisions for personal taxes.

l. Assume that you are in the 25% marginal tax bracket and that you have $20,000 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?

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Balance Sheets (Millions of Dollars) 2018 2019 Assets Cash and equivalents 60 50 Short-term investments 100 10 Accounts receivable 400 520 Inventories 620 $ 1,180 $ 3,900 820 Total current assets $1,400 $4,820 Gross fixed assets Less: Accumulated depreciation 1,320 $3,500 $4,900 1,000 $ 2,900 $ 4,080 Net fixed assets Total assets Liabilities and Equity Accounts payable Notes payable $ 300 $ 400 50 250 Accruals Total current liabilities 200 $ 550 240 $ 890 Long-term bonds 800 $ 1,350 1,000 1,100 Total liabilities Common stock 1,000 Retained earnings Total equity Total liabilities and equity 1,730 $ 2,730 $4,080 1,910 $ 2,910 $4,900 Income Statement (Millions of Dollars) 2018 2019 Net sales $5,500 4,300 $6,000 4,800 Cost of goods sold (excluding depr. & amort.) Depreciation and amortization Other operating expenses Total operating costs Earnings before interest and taxes (EBIT) 290 320 350 $4,940 $ 560 420 $5,540 $ 460 Less interest 68 108 $ 492 $ 352 Pre-tax earnings Taxes (25%) Net Income 123 88 $ 369 $ 264 Other Data 2018 2019 Stock price Shares outstanding (millions) Common dividends (millions) $50.00 $30.00 100 100 $90 $84 Tax rate 25% 25% Weighted average cost of capital (WACC) 10.00% 10.00% Statement of Cash Flows (Millions of Dollars) 2019 Operating Activities Net income before preferred dividends Noncash Adjustments Depreciation and amortization Due to Changes in Working Capital Change in accounts receivable Change in inventories Change in accounts payable Change in accruals Net cash provided by operating activities $ 264 320 (120) (200) 100 40 $ 404 Investing Activities Cash used to acquire fixed assets Change in short-term investments Net cash provided by investing activities $(920) 90 $(830) Financing Activities Change in notes payable Change in long-term debt Payment of cash dividends Net cash provided by financing activities $ 200 300 (84) $ 416 $ (10) Net change in cash and equivalents Cash and securities at beginning of the year Cash and securities at end of the year 60 50 ell