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.

Computron's 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	$ 1,990
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

Computron's 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 amortizationa	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
Notes:
aComputron 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%
Computron's 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 following 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?

c. What is free cash flow? Why is it important? What are FCF's five uses?

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?

e. What is Computron's free cash flow? 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?

g. 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.

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

i. The Tax Cut and Jobs Act (TCJA) was signed into law in 2017. Briefly describe its key provisions for corporate taxes.

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 its taxable income and federal tax liability?

k. Briefly describe the TCJA's key provisions for personal taxes.

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?