Managerial Finance Problem Set #1 - Computron Inc. is a public

Managerial Finance

Problem Set #1

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                               

                2019       2020

Net sales             2,059,200             3,500,640

Cost of Goods Sold          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)

Computron's Balance Sheet                        

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 Liabilities and Equity            881,280 1,731,955

a. Explain to the chairman of the board  three  properties of future cashflows that would likely help increase Computron’s value.

b. What is Computron’s net operating profit after taxes (NOPAT) for 2020?

c. Calculate Computron’s free cash flow for 2020 if net investment in total operating capital is $671,419.

d. Explain to the chairman of the board  five  uses of free cash flow to help maximize the value of the firm.

e. 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%.

f. Calculate the following  profitability ratios  for Computron in 2020:

g.

i. Operating profit margin

ii. Return on assets (ROA)

iii. Return on equity (ROE)

iv. Basic Earning Power (BEP)

h. Calculate the following  asset management ratios  for Computron in 2020:

i. total assets turnover

ii. Days sales outstanding (DSO)

i. Calculate the following  liquidity and debt management ratios  for Computron in 2020:

iii. Current ratio

iv. Quick ratio

v. Debt-to-assets ratio

vi. Times-interest earned ratio

j. 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            7.20%

b. Basic Earning Power   15.60%

c. ROE   15.40%

d. Return on Assets        10.80%

e. Total Assets turnover                1.5

f. Days sales outstanding              28.00

g. Current ratio 2.50

h. Quick ratio     1.90

i. Debt-to-assets ratio    15%

j. Times-interest-earned              13.00

i. 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%.

Submit your answers in a Word document.