Donna Jamison, a graduate of the University of Tennessee with four years of banking experience, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of electronic calculators.

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-presidentplus its major stockholders (who were all local businesspeople), was most upset when directorslearned how the expansion was going. Suppliers were being paid late and were unhappy, andthe bank was complaining about the deteriorating situation and threatening to cut off credit.As a result, Al Watkins, Computron's president, was informed that changes would have to bemade and quickly or he would be fired. At the board's insistence, Donna Jamison was giventhe job of assistant to Fred Campo, a retired banker who was Computron's chairman and largest stockholder. Campo agreed to give up a few of his golfing days and to help nurse the company back to health, with Jamison's assistance.Jamison began by gathering financial statements and other data.

Assume that you are Jamison's assistant and that you must help her answer the followingquestions for Campo.

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 liabilitiesand 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 operatingcurrent assets? What are operating current liabilities? How much net operating workingcapital and total net operating capital does Computron have?
e. What is Computron's free cash flow (FCF)? What are Computron's "net uses" of itsFCF?
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. Jamison 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 $5,000of interest income and $10,000 of dividend income. What is the company's federal taxliability?
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 yieldof 7% or equally risky ExxonMobil bonds with a yield of 10%. Which one should youchoose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?