Computron Inc. is a public corporation specializing in software manufacturing. The company designs and develops software programs that allow users to create their own documents, apps, animations, and other media content. The company’s sales revenue and profit margins have decreased over the years because of the Covid-19 pandemic and complaints of some parents about the effect of video games on their kids’ social life and academic performance.
The company recently hired Jenny Cochran, a graduate of UC to assist the chairman of the board to turnaround the fortunes of the company. Cochran recommendations included doubling the plant capacity, opening new sales offices outside the home territory, and launching an expensive advertising campaign to boost cash flows and stock price. Cochran believes that undertaking of such capital budgeting projects would increase sales, net income, and free cash flows to boost the stock price.
The corporate tax rate is 40%.
The following financial statement and reports were made available by the finance department for analysis:
Computron’s Income Statement
Cost of Goods Sold
Depreciation and amortization
Total Operating Costs
Earnings before interest and taxes (EBIT)
Computron’s Balance Sheet
Cash and equivalents
Total current assets
Gross fixed assets
Less: Accumulated depreciation
Net plant and equipment
Liabilities and equity
Total current liabilities
Total Liabilities and Equity
Explain to the chairman of the board three properties of future cashflows that would likely help increase Computron’s value.
What is Computron’s net operating profit after taxes (NOPAT) for 2020?
Calculate Computron’s free cash flow for 2020 if net investment in total operating capital is $671,419.
Explain to the chairman of the board five uses of free cash flow to help maximize the value of the firm.
Explain Economic Value Added (EVA) and compute Computron’s EVA for 2020 if total net operating capital is $1,354,579? The company’s weighted average cost of capital (WACC) is 10.0%.
Calculate the following profitability ratios for Computron in 2020:
Operating profit margin
Return on assets (ROA)
Return on equity (ROE)
Basic Earning Power (BEP)
Calculate the following asset management ratios for Computron in 2020:
total assets turnover
Days sales outstanding (DSO)
Calculate the following liquidity and debt management ratios for Computron in 2020:
Times-interest earned ratio
Given the following industry ratios for 2020, how do you evaluate the financial performance of Computron (poor or better) and explain:
a. Operating profit margin
b. Basic Earning Power
d. Return on Assets
e. Total Assets turnover
f. Days sales outstanding
g. Current ratio
h. Quick ratio
i. Debt-to-assets ratio
Computron has a negative free cash flow in 2020. The financial manager explains to the board that there is nothing wrong with value-adding growth, even if it causes negative free cash flows in the short-term. Using return on invested capital (ROIC) performance evaluation approach, determine whether Cochran’s recommendation is adding value. Total operating capital of the company is $1,354,579 and WACC is 10%.
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