Computron Industries: financial statement analysis &planning

See attached file

Mini case
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. 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 was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating 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 the board's insistence Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was Computron's 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 Jamison's help. Jamison began by gathering financial statements and data.

Balance sheets 2006 2007
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
Accruals 136,000 284,960
Total current liabilities $481,600 $1,328,960
Long-term debt 323,432 1,000,000
Common stock (100k shares) 460,000 460,000
Retained earnings 203,768 97,632
Total equity 663,768 557,632
Total liabilities and equity 1,468,800 2,886,592

Income statements
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
Stock prices $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, 2007
Balance of retained earnings, 12/31/06 $203,768
Add: Net income,2007 (95,136)
Less: Dividends paid, 2007 (11,000)
Balance of retained earnings, 12.31/2007 $97,632

Statement of Cash Flows, 2007

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 Jamison'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 expansion have on the asset side of the balance sheet? What effect did have on liabilites 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 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. Jamison also has asked you to estimate Computron's 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. Assume that a corporation has $100,000 of taxable income from operations plus $5000 of interest income and $10,000 of dividend income. What is the company's federal tax liability?
j. Assume that you are in the 25% marginal tax bracket and that you have $5000 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?