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 (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. Given that Computron could have issued preferred shares yielding 6% net of costs, why did the company decide to borrow more from the bank at a rate of 7.5%?

Jenny Cochran a graduate of the University of Ottawa with 4 years of banking experience, 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 shareholders (who were all local business people), 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, AI Watkins, Computron's president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board's insistence, Jenny Cochran was brought in and given the job of assistant to Gary Meissner, a retired banker who was Computron's chairman and largest shareholder. Meissner agreed to give up a few of his golfing days and to help nurse the company back to health, with Cochran's help.

Cochran began by gathering financial statements and other data. Note: these are available in the file Ch02 Tool kit.xlsx.

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2014 Balance Sheets 2015 Assets Cash 7,282 9,000 48,600 Short-term investments 20,000 351,200 Accounts receivable 632,160 Inventories 1,287,360 715,200 1,124,000 Total current assets 1,946,802 Gross fixed assets 1,202,950 491,000 Less: Accumulated depreciation 263,160 146,200 Net fixed assets 939,790 344,800 Total assets $2,886,592 $1,468,800 Liabilities and Equity $ 324,000 $ 145,600 Accounts payable Notes payable 720,000 200,000 Accruals 284,960 136,000 Total current liabilities 1,328,960 481,600 Long-term debt 323,432 1,000,000 Common stock (100,000 shares) 460,000 460,000 Retained earnings 97,632 203,768 Total equity 557,632 663,768 Total liabilities and equity $2,886,592 $1,468,800 2014 Income Statements 2015 Sales $5,834,400 $3,432,000 Cost of goods sold 4,980,000 2,864,000 Other expenses 720,000 340,000 Depreciation 116,960 18,900 3,222,900 Total operating costs 5,816,960 EBIT 17,440 209,100 Interest expense 62,500 176,000 EBT 146,600 (158,560) Taxes (40%) (63,424) $ (95,136) 58,640 $ 87,960 Net income (loss) Other Data Stock price Shares outstanding 8.50 6.00 100,000 100,000 EPS (0.95) 0.88 DPS 0.11 0.22 40% Tax rate 40%