Ch02 Mini Case
Ch02 Mini Case
Situation
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.
Notes:
a
Computron has no amortization charges.
Investing activities
Cash used to acquire fixed assets $ (920)
Change in short-term investments 90
Net cash provided by investing activities $ (830)
Financing Activities
Change in notes payable $ 200
Change in long-term debt 300
Payment of cash dividends (84)
Net cash provided by financing activities $ 416
a. (1.) What
It increased theeffect
salesdid the expansion
by 500K which means have
thatonthesales
new and net income?
expansions Answer:
are proving SeeifMini
positive Case
we look Show.
solely on Net Sales. However, the Net Income decreased.
The reason this happened is because the interest and operating expenses with the expansions increased significantly so it didn't actually increase the Net Income o
Freenet
The Cash Flowiniscash
change the cash
and available for investors after the company ishas used the necessary amounts on
stillits own operation and of
investment needs.
a.
Free(2.) What
It increased
cash the
flow effect did
current
is so theequivalents
assets,
important expansion
largely
because
from
dueithave
to the
onbeginning
their
really the asset
AR and
shows
toside
the end
ifofinventory
the ofgoing
companythe negative.
balance
up.cash
has When However,
sheet?
in looking
general
the
at company
Answer:
the
which See assets,
total Mini
allows the
has
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business
amount
Showultimately cash and securities.
tocash
keep going.
A large
it is alsoreason for the decline with the change is because the expansion in their PP&E. This shows in their investing activities under used to acquire fixed ass
The five increased
The amount usesofofcash because
FCF include:
left
of the gross fixed assets which would be connected to the doubling the plant capacity.
is not very much going in to the next year and would not be able to cover a fraction of their total operating expenses.
b.
They - Paying
Whatwould interest
do have
you concludeto debtholders
from the
to feel confident thatstatement of cash
their net sales would flows? Answer:
be good enoughSeetheMini
next Case Show.
year to help with the expenses so they end up with cash by the end.
The-change
Repaying debtholders
in cash this next year will also be telling if the new expansions are a good addition or not.
- Paying dividends to shareholders
c. What is free cash
- Repurchase flow?
of stock Why
from is it important? What are the five uses of FCF? Answer: See Mini Case Show.
shareholders
- Buying short-term investments or other nonoperating assets
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?
NOPAT is the amount of profit Computron would generate if it had no debt and held no financial assets.
Those current assets used in operations are called operating current assets, and the current liabilities that result from operations
are called operating current liabilities. Net operating working capital is equal to operating current assets minus operating
current liabilities.
Operating Operating
2019 NOWC = current assets
− current
= $1,390 − liabilities
$640
= $750
Operating Operating
2018 NOWC = current assets
− current
= $1,080 − liabilities
$500
= $580
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 (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?
Operating Profitability
The operating profitability (OP) ratio shows how many dollars of operating profit are generated by each dollar of sales.
Operating profitability declined and the capital utlization worsened, each contributing to the big decrease in ROIC.
g. What is Computron's EVA? The cost of capital was 10% in both years.
i. The Tax Cut and Jobs Act was signed into law in 2017. Briefly describe its key provisions related to corporate tax taxation.
Answer: See Mini Case Show.
Previously corporate tax rates were progressive. With the change, it is just a flat 21% to all taxable income.
The law also changed how interest expense is deducted. Previously it was fully deductible but after the act for the years 2018-2021 it reduced the
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 the company's
federal tax liability?
k. The Tax Cut and Jobs Act was signed into law in 2017. Briefly describe its key provisions related to personal taxation. Answer:
See Mini Case Show.
the key differences from before and after the act was passed are the different tax rates for the progressive brackets as well as different amounts f
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?
After-tax interest
Solve for T
Tax rate = 1 - (Muni yield / Corp yield)
Tax Rate = 30.00%
et Income decreased.
y increase the Net Income overall.
estment
cash needs.
and securities.
keep going.
sh used to acquire fixed assets.
enses.
th cash by the end.
2018-2021 it reduced the allowable interest expense to 30% of EBITA and after 2021 to 30% of EBIT
ell as different amounts for each tax bracket