'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. (Data Attached)

1. 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 do you conclude from the statement of cash flows?
2. 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?
3. What is Computron's free cash flow (FCF)? What are Computron's "net uses" of its FCF?
4. 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?
5. What is Computron's EVA?The cost of capital was 10% in both years.
6. Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability?
7. Assume that you are in the 25% marginal tax bracket and that you have $50,000 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?
8. Computron's Income Statement 2019 2020 INCOME STATEMENT Net sales $2,059,200 $3,500,640 Cost of Goods Sold (Except depr. and amort.) $1,718,400 $2,988,000 Other Expenses $204,000 $432,000 Depreciation and amortization $11,340 $70,176 Total Operating Costs $1,933,740 $3,490,176 Earnings before interest and taxes (EBIT) $125,460 $10,464 Less interest $37,500 $105,600 Pre-tax earnings $87,960 $(95,136) Taxes (40%) $35,184 $(38,054) Net Income $52,776 $(57,082) Dividends $13,200 $6,600 Tax rate 40% 40% Computron's Balance Sheets 2019 2020 Assets Cash and equivalents $5,400 $4,369 Short-term investments $29,160 $12,000 Accounts receivable $210,720 $379,296 Inventories $429,120 $772,416 Total current assets $674,400 $1,168,081 Gross fixed assets $294,600 $721,770 Less: Accumulated depreciation $87,720 $157,896 Net plant and equipment $206,880 $563,874 Total assets $881,280 $1,731,955 Liabilities and equity Accounts payable $87,360 $194,400 Notes payable $120,000 $432,000 Accruals $81,600 $170,976 Total current liabilities $288,960 $797,376 Long-term bonds $194,059 $600,000 Common Stock $276,000 $276,000 Retained Earnings $122,261 $58,579 Total Equity $398,261 $334,579 Total Liabilites and Equity $881,280 $1,731,955 Computron's Statement of Cash Flows 2020 Operating Activities Net Income before preferred dividends $(57,081.60) Noncash adjustments Depreciation and amortization $70,176.00 Due to changes in working capital Change in accounts receivable $(168,576.00) Change in inventories $(343,296.00) Change in accounts payable $107,040.00 Change in accruals $89,376.00 Net cash provided by operating activities $(302,361.60) Investing activities Cash used to acquire fixed assets $(427,170.00) Change in short-term investments $17,160.00 Net cash provided by investing activities $(410,010.00) Financing Activities Change in notes payable $312,000.00 Change in long-term debt $405,940.80 Payment of cash dividends $(6,600.00) Net cash provided by financing activities $711,340.80 Net change in cash and equivilents $(1,030.80) Cash and securities at beginning of the year $5,400.00 Cash and securities at end of the year $4,369.20 Corporate Tax Rates If a corporation's taxable income is between: It pays this amount on the base of the bracket: Plus this percentage on the excess over the base (1) (2) (3) (4) $0 $50,000 $0 15.0% $50,000 $75,000 $7,500 25.0% $75,000 $100,000 $13,750 34.0% $100,000 $335,000 $22,250 39.0% $335,000 $10,000,000 $113,900 34.0% $10,000,000 $15,000,000 $3,400,000 35.0% $15,000,000 $18,333,333 $5,150,000 38.0% $18,333,333 and up $6,416,667 35.0%