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.

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%.

 

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