Donna Lee, a graduate of the University of New York with 4 years of banking experience, was recentlybrought in as assistant to the chairman of the board of Computron Industries, a manufacturer ofelectronic calculators.The company doubled its plant capacity, opened new sales offices outside its home territory, andlaunched 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 wasgoing. Suppliers were being paid late and were unhappy, and the bank was complaining about thedeteriorating situation and threatening to cut off credit. As a result, Al Watkins, Computron's president,was informed that changes would have to be made, and quickly, or he would be fired. Also, at theboard's insistence Donna Lee was brought in and given the job of assistant to Fred Campo, a retiredbanker who was Computron's chairman and largest stockholder. Campo agreed to give up a few of hisgolfing days and to help nurse the company back to health, with Lee's help.Lee began by gathering financial statements and other data.

Balance Sheets 2018 2019

Assets

Cash 9,000 7,282

Short-term investments 48,600 20,000

Accounts receivable 351,200 632,160

Inventories 715,200 1,287,360

Total current assets 1,124,000 1,946,802

Gross fixed assets 491,000 1,202,950

Less: Accumulated depreciation 146,200 263,160

Net fixed assets 344,800 939,790

TOTAL ASSETS 1,468,800 2,886,592

Liabilities and Equity

Accounts payable 145,600 324,000

Notes payable 200,000 720,000

Accruals136,000 284,960

Total current liabilities 481,600 1,328,960

Long-term debt 323,432 1,000,000

Common stock (100,000 shares) 460,000 460,000

Retained earnings 203,768 97,632

Total equity663,768 557,632

TOTAL LIABILITIES AND EQUITY 1,468,800 2,886,592

Income Statements 2018 2019

Sales 3,432,000 5,834,400

Cost of goods sold 2,864,000 4,980,000

Other expenses 340,000 720,000

Depreciation 18,900 116,960

Total operating costs 3,222,900 5,816,960

EBIT 209,100 17,440

Interest expense 62,500 176,000

EBT 146,600 (158,560)

Taxes (40%) 58,640 (63,424)

Net income 87,960 (95,136)

Other Data 2018 2019

Stock price 8.50 6.00

Shares outstanding 100,000 100,000

EPS 0.880 (0.951)

DPS 0.220 0.110

Tax rate 40% 40%

Statement of Retained Earnings, 2019

Balance of retained earnings, 12/31/2018 203,768

Add: Net income, 2019 (95,136)

Less: Dividends paid, 2019 (11,000)

Balance of retained earnings, 12/31/2019 97,632

Statement of Cash Flows, 2019

Operating Activities

Net income (95,136)

Adjustments

Noncash adjustments:

Depreciation 116,960

Changes in working capital:

Change in accounts receivable (280,960)

Change in inventories (572,160)

Change in accounts payable 178,400

Change in accruals 148,960

Net cash provided by operating activities (503,936)

Investing Activities

Cash used to acquire fixed assets (711,950)

Change in short-term investments 28,600

Net cash provided by investing activities (683,350)

Financing Activities

Change in notes payable 520,000

Change in long-term debt 676,568

Change in common stock-

Payment of cash dividends (11,000)

Net cash provided by financing activities 1,185,568

Summary

Net change in cash (1,718)

Cash at beginning of year 9,000

Cash at end of year 7,282

Assume that you are Lee's assistant, and you must help her answer the following questions for Campo.

a. What effect did the expansion have on sales and net income? What effect did the expansionhave 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 are operating current assets? What are operating current liabilities? How much netoperating working capital and total net operating capital does Computron have?

e. What are Computron's net operating profit after taxes (NOPAT) and free cash flow (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. Lee also has asked you to estimate Computron's EVA. She estimates that the after-tax cost ofcapital was 10% in both years.

h. Assume that a corporation has $100,000 of taxable income from operations plus $5,000 ofinterest income and $10,000 of dividend income. What is the company's federal tax liability?

Assume that you are in the 25% marginal tax bracket and that you have $5,000 to invest. Youhave narrowed your investment choices down to California bonds with a yield of 7% or equallyrisky ExxonMobil bonds with a yield of 10%. Which one should you choose and why? At whatmarginal tax rate would you be indifferent to the choice between California and ExxonMobilbonds?