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 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?

c. What is Computron's free cash flow (FCF)? What are Computron's "net uses" of its FCF?

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

e. What is Computron's EVA? The after-tax cost of capital was 10 percent in both years.

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

g. 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?

h. 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?

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 Ch06 Tool Kit.xls in the Mini Case tab.

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S1,124,000 $1,946,802 Less: Accumulated deprediation 51.468,800 $2,886,592 Liabilties and Equity Common stock (100,000 shares) $663,768 557632 equity