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. Balance Sheets (Millions of Dollars) 2018 2019 Assets Cash and equivalents $ 60 $ 50 Short-term investments 100 10 Accounts receivable 400 520 Inventories 620 820 Total current assets $ 1,180 $1,400 Gross fixed assets $ 3,900 $4,820 Less: Accumulated depreciation 1,000 1,320 Net fixed assets $2,900 $3,500 Total assets $4,080 $4,900 Liabilities and Equity Accounts payable $ 300 $ 400 Notes payable 50 250 Accruals 200 240 Total current liabilities $ 550 $ 890 Long-term bonds 800 1,100 Total liabilities $ 1,350 Common stock 1,000 1,000 Retained earnings 1,730 1,910 Total equity $2,730 $2,910 Total liabilities and equity $4,080 $4,900 Income Statement (Millions of Dollars) 2018 2019 Net sales $5,500 $6,000 Cost of goods sold (excluding depr. & amort.) 4,300 4,800 Depreciation and amortization* 290 320 Other operating expenses 350 420 Total operating costs $4,940 $5,540 Earnings before interest and taxes (EBIT) 560 $ 460 Less interest 68 108 Pre-tax earnings $ 492 $ 352 Taxes (25%) 123 88 Net Income 369 $ 264 Note: *Computron has no amortization charges. Other Data 2018 2019 Stock price $50.00 $30.00 Shares outstanding (millions) 100 100 Common dividends (millions) $90 $84 Tax rate 25% 25% Weighted average cost of capital (WACC) 10.00% 10.00% Statement of Cash Flows (Millions of Dollars) 2019 Operating Activities Net income before preferred dividends $ 264 Noncash Adjustments Depreciation and amortization 320 Due to Changes in Working Capital Change in accounts receivable (120) Change in inventories (200) Change in accounts payable 100 Change in accruals 40 Net cash provided by operating activities $ 404 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 Net change in cash and equivalents $ (10) Cash and securities at beginning of the year 60 Cash and securities at end of the year $ 50 Assume that you are Cochran's assistant and that you must help her answer the fol- lowing questions: 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? n What is free cash flow? Why is it important? What are FCF's five uses? What is Computron's net operating profit after taxes (NOPAT)? What are operat- ing current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have? What is Computron's free cash flow? What are Computron's "net uses" of its FCF? 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? . Cochran also has asked you to estimate Computron's Economic Value Added (EVA). She estimates that the after-tax cost of capital was 10% in both years. . What happened to Computron's Market Value Added (MVA)? . The Tax Cut and Jobs Act (TCJA) was signed into law in 2017. Briefly describe its key provisions for corporate taxes. . 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 its taxable income and federal tax liability? . Briefly describe the TCJA's key provisions for personal taxes. . 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 yield- ing 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