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.

The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Computron’s results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice president plus its major stockholders (who were all local businesspeople), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, Robert Edwards, Computron’s president, was informed that changes would have to be made—and quickly—or he would be fired. At the board’s insistence, Jenny Cochran was given the job of assistant to Gary Meissner, a retired banker who was Computron’s chairman and largest stockholder. Meissner agreed to give up a few of his golfing days and to help nurse the company back to health, with Cochran’s assistance.

Cochran began by gathering financial statements and other data. Note: these are available in the file Ch02 Tool Kit.xls in the Mini Case tab.

Assume that you are Cochran’s assistant and that you must help her answer the following questions for Meissner.

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 the five uses of FCF?

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 (FCF)? What are Computron’s “net uses” of its FCF?

f. Calculate Computron’s return on invested capital. Computron has a 10% cost of capital (WACC). Do you think Computron’s growth added value?

g. Cochran also has asked you to estimate Computron’s 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. 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 federal tax liability?

j. Assume that you are in the 25% 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% or equally risky ExxonMobil bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?

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2012 2013 Balance Sheets Assets Cash 9,000 7,282 Short-term investments 48,600 20,000 Accounts receivable 351,200 632,160 Inventories 715,200 1,287,360 $1,946,802 Total current assets $1,124,000 Gross fixed assets 491,000 1,202,950 Less: Accumulated depreciation 146,200 $ 344,800 263,160 Net fixed assets $ 939,790 Total assets $1,468,800 $2,886,592 Liabilities and Equity Accounts payable Notes payable $ 145,600 $ 324,000 200,000 720,000 Accruals 136,000 $ 481,600 284,960 Total current liabilities $1,328,960 Long-term debt Common stock (100,000 shares) 323,432 1,000,000 460,000 460,000 Retained earnings 203,768 $ 663,768 97,632 $ 557,632 Total equity Total liabilities and equity $1,468,800 2012 $2,886,592 2013 2012 2013 Balance Sheets Assets Cash 9,000 7,282 Short-term investments 48,600 20,000 Accounts receivable 351,200 632,160 Inventories 715,200 1,287,360 $1,946,802 Total current assets $1,124,000 Gross fixed assets 491,000 1,202,950 Less: Accumulated depreciation 146,200 $ 344,800 263,160 Net fixed assets $ 939,790 Total assets $1,468,800 $2,886,592 Liabilities and Equity Accounts payable Notes payable $ 145,600 $ 324,000 200,000 720,000 Accruals 136,000 $ 481,600 284,960 Total current liabilities $1,328,960 Long-term debt Common stock (100,000 shares) 323,432 1,000,000 460,000 460,000 Retained earnings 203,768 $ 663,768 97,632 $ 557,632 Total equity Total liabilities and equity $1,468,800 2012 $2,886,592 2013