Please see the attached file.
Donna Jamison, a graduate of the University of Tennessee with 4 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. Computrons 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 was going. Suppliers were being paid late and were unhappy, and the bank was com-plaining about the deteriorating situation and threatening to cut off credit. As a result, Al Watkins, Computrons president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the boards insistence Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computrons 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 Jamisons help. Jamison began by gathering financial statements and other data.
Assume that you are Jamisons 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 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 the five uses of FCF?
d. 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 are Computrons net operating profit after taxes ( NOPAT) and free cash flow ( FCF)?
f. Calculate Computrons return on invested capital. Computron has a 10% cost of capital ( WACC). Do you think Computrons growth added value?
g. Jamison also has asked you to estimate Computrons EVA. She estimates that the after- tax cost of capital was 10% in both years.
h. What happened to Computrons Market Value Added ( MVA)?
i. Assume that a corporation has $ 100,000 of taxable income from operations plus $ 5,000 of interest income and $ 10,000 of dividend income. What is the companys federal tax liability?
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 yield of 7% or equally risky ExxonMobil bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?
The solution explains how to calculate free cash flows, EVA, MVA and NOPAT