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)What caused the decline in the ROIC?Was it due to operating profitability or capital utilization?Do you think Computron’s growth added value?What is Computron's EVA? The cost of capital was 10% in both years.Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability?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? Computron's Income Statement20192020INCOME STATEMENTNet sales$2,059,200$3,500,640Cost of Goods Sold (Except depr. and amort.)Other Expenses$1,718,400$2,988,000$204,000$432,000Depreciation and amortization$11,340$70,1763,490,176Total Operating CostsEarnings before interest and taxes (EBIT)$1,933,740$$125,460$10,464Less interest$37,500$105,600Pre-tax earningsTaxes (40%)Net Income$487,960$(95,136)35,184$(38,054)2$52,776$(57,082)Dividends$13,200$6,600Tax rate40%40%|Computron's Balance Sheets20192020AssetsCash and equivalentsShort-term investments$5,400$4,3692$29,160$12,000Accounts receivable$210,720$379,296Inventories$429,120$772,416Total current assets$674,400$1,168,081Gross fixed assets2$294,600$721,770Less: Accumulated depreciation$87,7202$157,896Net plant and equipment$206,880563,874Total assets$881,280$1,731,955Liabilities and equityАсcounts payableNotes payable$87,360$194,400$120,000$432,00081,600170,976797,376Accruals$$Total current liabilities$288,960$Long-term bondsCommon StockRetained EarningsTotal Equity$194,059$600,000$276,000$276,000$122,2612$58,579$398,261$334,579Total Liabilites and Equity$881,280$1,731,955 Computron's Statemei. of Cash Flows2020Operating ActivitiesNet Income before preferred dividends(57,081.60)Noncash adjustmentsDepreciation and amortizationDue to changes in working capital70,176.00Change in accounts receivableS(168,576.00)Change in inventoriesChange in accounts payableChange in acerualsNet cash provided by operating activities(343,296.00)107,040.0089,376.00(302,361.60)Investing activitiesCash used to acquire fixed assetsChange in short-term investmentsNet cash provided by investing activities(427,170.00)17,160.00(410,010.00)Financing ActivitiesChange in notes payableChange in long-term debtPayment of cash dividendsNet cash provided by financing activities312,000.00405,940.80S(6,600.00)711,340.80Net change in cash and equivilents(1,030.80)Cash and securities at beginning of the year5,400.00Cash and securities at end of the year4,369.20Corporate Tax RatesPlus thispercentage on theexcess over theIt pays this amount onthe base of the bracket:If a corporation's taxable income is between:base(1)(2)(3)(4)$o$50,000SO15.0%$50,000 7$75,000 /$75,000$7,50025.0%$100,000$13,75034.0%$100,000$335,000$22,25039.0%$335,000$10,000,000$113,90034.0%S10,000,00035.0%$15,000,000$18,333,333$3,400,000$15,000,000$5,150,00038.0%S18,333,333and up$6,416,66735.0%

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Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter4: Analysis Of Financial Statements

Section: Chapter Questions

Problem 24P: Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales 795.0 Cost of...

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Question

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)

What caused the decline in the ROIC?
Was it due to operating profitability or capital utilization?
Do you think Computron’s growth added value?
What is Computron's EVA? The cost of capital was 10% in both years.
Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability?
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?

Computron's Income Statement
2019
2020
INCOME STATEMENT
Net sales
$
2,059,200
$
3,500,640
Cost of Goods Sold (Except depr. and amort.)
Other Expenses
$
1,718,400
$
2,988,000
$
204,000
$
432,000
Depreciation and amortization
$
11,340
$
70,176
3,490,176
Total Operating Costs
Earnings before interest and taxes (EBIT)
$
1,933,740
$
$
125,460
$
10,464
Less interest
$
37,500
$
105,600
Pre-tax earnings
Taxes (40%)
Net Income
$4
87,960
$
(95,136)
35,184
$
(38,054)
2$
52,776
$
(57,082)
Dividends
$
13,200
$
6,600
Tax rate
40%
40%
|Computron's Balance Sheets
2019
2020
Assets
Cash and equivalents
Short-term investments
$
5,400
$
4,369
2$
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
2$
294,600
$
721,770
Less: Accumulated depreciation
$
87,720
2$
157,896
Net plant and equipment
$
206,880
563,874
Total assets
$
881,280
$
1,731,955
Liabilities and equity
Асcounts payable
Notes payable
$
87,360
$
194,400
$
120,000
$
432,000
81,600
170,976
797,376
Accruals
$
$
Total current liabilities
$
288,960
$
Long-term bonds
Common Stock
Retained Earnings
Total Equity
$
194,059
$
600,000
$
276,000
$
276,000
$
122,261
2$
58,579
$
398,261
$
334,579
Total Liabilites and Equity
$
881,280
$
1,731,955

Computron's Statemei. of Cash Flows
2020
Operating Activities
Net Income before preferred dividends
(57,081.60)
Noncash adjustments
Depreciation and amortization
Due to changes in working capital
70,176.00
Change in accounts receivable
S
(168,576.00)
Change in inventories
Change in accounts payable
Change in aceruals
Net cash provided by operating activities
(343,296.00)
107,040.00
89,376.00
(302,361.60)
Investing activities
Cash used to acquire fixed assets
Change in short-term investments
Net cash provided by investing activities
(427,170.00)
17,160.00
(410,010.00)
Financing Activities
Change in notes payable
Change in long-term debt
Payment of cash dividends
Net cash provided by financing activities
312,000.00
405,940.80
S
(6,600.00)
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
Plus this
percentage on the
excess over the
It pays this amount on
the base of the bracket:
If a corporation's taxable income is between:
base
(1)
(2)
(3)
(4)
$o
$50,000
SO
15.0%
$50,000 7
$75,000 /
$75,000
$7,500
25.0%
$100,000
$13,750
34.0%
$100,000
$335,000
$22,250
39.0%
$335,000
$10,000,000
$113,900
34.0%
S10,000,000
35.0%
$15,000,000
$18,333,333
$3,400,000
$15,000,000
$5,150,000
38.0%
S18,333,333
and up
$6,416,667
35.0%

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