Professional Documents
Culture Documents
Chapter III
Mini case
Mini case
Donna Jamison brought as assistant to chairman of
the board.
The company doubled its plant capacity, opened
new sales offices outside its home territory, and
launched an expensive advertising campaign.
Computrons results were not satisfactory, to put it
mildly.
As a result, Al Watkins, Computrons president, was
informed that changes would have to be made, and
quickly, or he would be fired.
Balance sheet
Assets
Assets
Cash
Cash
Short-term
Short-terminvestments.
investments.
Accounts
Accountsreceivable
receivable
Inventories
Inventories
total
totalcurrent
currentassets
assets
Gross
Grossfixed
fixed assets
assets
Less:
Less:accumulated
accumulated
depreciation
depreciation
net
netfixed
fixed assets
assets
Total
Totalassets
assets
2003
2003
$9,000
$9,000
48,600
48,600
351,200
351,200
715,200
715,200
$1,124,000
$1,124,000
491,000
491,000
146,200
146,200
2004
2004
$7,282
$7,282
20,000
20,000
632,160
632,160
1,287,360
1,287,360
$1,946,802
$1,946,802
1,202,950
1,202,950
263,160
263,160
$344,800
$344,800
$1,468,800
$1,468,800
$939,790
$939,790
$2,886,592
$2,886,592
Liabilities
Liabilitiesand
andequity
equity
Accounts
Accountspayable
payable
Notes
Notespayable
payable
Accruals
Accruals
total
totalcurrent
currentliabilities
liabilities
Long-term
Long-termdebt
debt
Common
Commonstock
stock(100,000
(100,000
shares)
shares)
Retained
Retainedearnings
earnings
total
totalequity
equity
Total
Totalliabilities
liabilitiesand
andequity
equity
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000
720,000
720,000
284,960
284,960
$1,328,960
$1,328,960
1,000,000
1,000,000
460,000
460,000
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632
$557,632
$557,632
$2,886,592
$2,886,592
Income statements
Sales
Sales
Cost
Costof
ofgoods
goodssold
sold
Other
Otherexpenses
expenses
Depreciation
Depreciation
total
totaloperating
operatingcosts
costs
EBIT
EBIT
Interest
Interestexpense
expense
EBT
EBT
Taxes
Taxes(40%)
(40%)
Net
Netincome
income
2003
2003
$3,432,000
$3,432,000
2,864,000
2,864,000
340,000
340,000
18,900
18,900
$3,222,900
$3,222,900
$209,100
$209,100
62,500
62,500
$146,600
$146,600
58,640
58,640
$87,960
$87,960
2004
2004
$5,834,400
$5,834,400
4,980,000
4,980,000
720,000
720,000
116,960
116,960
$5,816,960
$5,816,960
$17,440
$17,440
176,000
176,000
($158,560)
($158,560)
-63,424
-63,424
($95,136)
($95,136)
Other
Otherdata
data
2002
2002
Stock
Stock price
price
Shares
Shares outstanding
outstanding
EPS
EPS
DPS
DPS
$8.50
$8.50
100,000
100,000
$0.88
$0.88
$0.22
$0.22
2003
2003
$6.00
$6.00
100,000
100,000
($0.95)
($0.95)
$0.11
$0.11
Statement
Statementof
ofretained
retainedearnings,
earnings,2004
2004
Balance
Balanceof
ofretained
retainedearnings,
earnings,
12/31/2003
12/31/2003
add:
add: net
netincome,
income,2004
2004
less:
less:dividend
dividendpaid,
paid,2004
2004
Balance
Balanceof
ofretained
retainedearnings,
earnings,
12/31/2004
12/31/2004
$203,768
$203,768
($95,136)
($95,136)
($11,000)
($11,000)
$97,632
$97,632
Operating
Operatingactivities
activities
Net
Netincome
income
Adjustments:
Adjustments:
noncash
noncashadjustments:
adjustments:
depreciation
depreciation
changes
changesininworking
workingcapital:
capital:
change
changeininaccounts
accountsreceivable
receivable
change
changeinininventories
inventories
change
changeininaccounts
accountspayable
payable
($95,136)
($95,136)
116,960
116,960
-280,960
-280,960
-572,160
-572,160
178,400
178,400
change
changeininaccruals
accruals
Net
Netcash
cashprovided
providedby
byoperating
operatingactivities
activities
148,960
148,960
($503,936)
($503,936)
Long-term
Long-terminvesting
investingactivities
activities
Cash
Cashused
usedtotoacquire
acquirefixed
fixedassets
assets
($711,950)
($711,950)
Financing
Financingactivities
activities
change
changeininshort
shortterm
terminvestments
investments
change
changeininnotes
notespayable
payable
change
changeininlong-term
long-termdebt
debt
change
in
common
stock
change in common stock
payment
paymentofofcash
cashdividends
dividends
Net
Netcash
cashprovided
providedby
byfinancing
financingactivities
activities
$28,600
$28,600
$520,000
$520,000
$676,568
$676,568
$$
-($11,000)
($11,000)
$1,214,168
$1,214,168
Summary
Summary
Net
Netchange
change inincash
cash
Cash
Cashat
atbeginning
beginningof
ofyear
year
Cash
Cashat
atend
end of
ofyear
year
($1,718)
($1,718)
9,000
9,000
$7,282
$7,282
Answer
Sales
Sales
Cost
Costofofgoods
goodssold
sold
Other
Otherexpenses
expenses
Depreciation
Depreciation
total
totaloperating
operatingcosts
costs
EBIT
EBIT
Interest
Interestexpense
expense
EBT
EBT
Taxes
Taxes(40%)
(40%)
Net
Netincome
income
2003
2003
$3,432,000
$3,432,000
2,864,000
2,864,000
340,000
340,000
18,900
18,900
$3,222,900
$3,222,900
$209,100
$209,100
62,500
62,500
$146,600
$146,600
58,640
58,640
$87,960
$87,960
2004
2004
$5,834,400
$5,834,400 =2,402,400
4,980,000
4,980,000
720,000
720,000
116,960
116,960
$5,816,960
$5,816,960
$17,440
$17,440
176,000
176,000
($158,560)
($158,560)
-63,424
-63,424
($95,136)
($95,136) =(-)183,093
Sales
Sales
Cost
Costofofgoods
goodssold
sold
Other
Otherexpenses
expenses
Depreciation
Depreciation
total
totaloperating
operatingcosts
costs
EBIT
EBIT
Interest
Interestexpense
expense
EBT
EBT
Taxes
Taxes(40%)
(40%)
Net
Netincome
income
2003
2003
$3,432,000
$3,432,000
2,864,000
2,864,000
340,000
340,000
18,900
18,900
$3,222,900
$3,222,900
$209,100
$209,100
62,500
62,500
$146,600
$146,600
58,640
58,640
$87,960
$87,960
2004
2004
$5,834,400
$5,834,400 =2,402,400
4,980,000
4,980,000
720,000
720,000
116,960
116,960
$5,816,960
$5,816,960
$17,440
$17,440
176,000
176,000
($158,560)
($158,560)
-63,424
-63,424
($95,136)
($95,136) =183,093
Assets
Assets
Cash
Cash
Short-term
Short-terminvestments.
investments.
Accounts
Accountsreceivable
receivable
Inventories
Inventories
total
totalcurrent
currentassets
assets
Gross
Grossfixed
fixedassets
assets
Less:
Less:accumulated
accumulated
depreciation
depreciation
net
netfixed
fixedassets
assets
Total
Totalassets
assets
2003
2003
$9,000
$9,000
48,600
48,600
351,200
351,200
715,200
715,200
$1,124,000
$1,124,000
491,000
491,000
146,200
146,200
2004
2004
$7,282
$7,282
20,000
20,000
632,160
632,160
1,287,360
1,287,360
$1,946,802
$1,946,802
1,202,950
1,202,950
263,160
263,160
$344,800
$344,800
$1,468,800
$1,468,800
$939,790
$939,790
$2,886,592
$2,886,592 =1,417,792
Liabilities
Liabilitiesand
andequity
equity
Accounts
Accountspayable
payable
Notes
Notespayable
payable
Accruals
Accruals
total
totalcurrent
currentliabilities
liabilities
Long-term
Long-termdebt
debt
Common
Commonstock
stock(100,000
(100,000
shares)
shares)
Retained
Retainedearnings
earnings
total
totalequity
equity
Total
Totalliabilities
liabilitiesand
andequity
equity
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000 =178,400
=520,000
720,000
720,000
284,960
284,960 =148,960
$1,328,960
$1,328,960
1,000,000
1,000,000
460,000
460,000
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632
$557,632
$557,632
$2,886,592
$2,886,592
Liabilities
Liabilitiesand
andequity
equity
Accounts
Accountspayable
payable
Notes
Notespayable
payable
Accruals
Accruals
total
totalcurrent
currentliabilities
liabilities
Long-term
Long-termdebt
debt
Common
Commonstock
stock(100,000
(100,000
shares)
shares)
Retained
Retainedearnings
earnings
total
totalequity
equity
Total
Totalliabilities
liabilitiesand
andequity
equity
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000
720,000
720,000
284,960
284,960
$1,328,960
$1,328,960
1,000,000
1,000,000
460,000
460,000
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632
$557,632
$557,632
$2,886,592
$2,886,592
=178,400
=520,000
=148,960
=847,360
Liabilities
Liabilitiesand
andequity
equity
Accounts
Accountspayable
payable
Notes
Notespayable
payable
Accruals
Accruals
total
totalcurrent
currentliabilities
liabilities
Long-term
Long-termdebt
debt
Common
Commonstock
stock(100,000
(100,000
shares)
shares)
Retained
Retainedearnings
earnings
total
totalequity
equity
Total
Totalliabilities
liabilitiesand
andequity
equity
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000
720,000
720,000
284,960
284,960
$1,328,960
$1,328,960 =847,360
=676,568
1,000,000
1,000,000
460,000
460,000
=1,523,928
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632
$557,632
$557,632
$2,886,592
$2,886,592
Liabilities
Liabilitiesand
andequity
equity
Accounts
Accountspayable
payable
Notes
Notespayable
payable
Accruals
Accruals
total
totalcurrent
currentliabilities
liabilities
Long-term
Long-termdebt
debt
Common
Commonstock
stock(100,000
(100,000
shares)
shares)
Retained
Retainedearnings
earnings
total
totalequity
equity
Total
Totalliabilities
liabilitiesand
andequity
equity
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000
720,000
720,000
284,960
284,960
$1,328,960
$1,328,960
1,000,000
1,000,000
460,000
460,000
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632 =106,136
$557,632
$557,632
$2,886,592
$2,886,592
Operating
Operatingactivities
activities
Net
Netincome
income
Adjustments:
Adjustments:
noncash
noncashadjustments:
adjustments:
depreciation
depreciation
changes
changesininworking
workingcapital:
capital:
change
changeininaccounts
accountsreceivable
receivable
change
changeinininventories
inventories
change
changeininaccounts
accountspayable
payable
($95,136)
($95,136)
116,960
116,960
-280,960
-280,960
-572,160
-572,160
178,400
178,400
change
changeininaccruals
accruals
Net
Netcash
cashprovided
providedby
byoperating
operatingactivities
activities
148,960
148,960
($503,936)
($503,936)
Long-term
Long-terminvesting
investingactivities
activities
Cash
Cashused
usedtotoacquire
acquirefixed
fixedassets
assets
($711,950)
($711,950)
Financing
Financingactivities
activities
change
changeininshort
shortterm
terminvestments
investments
change
changeininnotes
notespayable
payable
change
changeininlong-term
long-termdebt
debt
change
in
common
stock
change in common stock
payment
paymentofofcash
cashdividends
dividends
Net
Netcash
cashprovided
providedby
byfinancing
financingactivities
activities
$28,600
$28,600
$520,000
$520,000
$676,568
$676,568
$$
-($11,000)
($11,000)
$1,214,168
$1,214,168
Operating
Operatingactivities
activities
Net
Netincome
income
Adjustments:
Adjustments:
noncash
noncashadjustments:
adjustments:
depreciation
depreciation
changes
changesininworking
workingcapital:
capital:
change
changeininaccounts
accountsreceivable
receivable
change
changeinininventories
inventories
change
changeininaccounts
accountspayable
payable
($95,136)
($95,136)
116,960
116,960
-280,960
-280,960
-572,160
-572,160
178,400
178,400
change
changeininaccruals
accruals
Net
Netcash
cashprovided
providedby
byoperating
operatingactivities
activities
148,960
148,960
($503,936)
($503,936)
Long-term
Long-terminvesting
investingactivities
activities
Cash
Cashused
usedtotoacquire
acquirefixed
fixedassets
assets
($711,950)
($711,950)
Financing
Financingactivities
activities
change
changeininshort
shortterm
terminvestments
investments
change
changeininnotes
notespayable
payable
change
changeininlong-term
long-termdebt
debt
change
in
common
stock
change in common stock
payment
paymentofofcash
cashdividends
dividends
Net
Netcash
cashprovided
providedby
byfinancing
financingactivities
activities
$28,600
$28,600
$520,000
$520,000
$676,568
$676,568
$$
-($11,000)
($11,000)
$1,214,168
$1,214,168
Operating
Operatingactivities
activities
Net
Netincome
income
Adjustments:
Adjustments:
noncash
noncashadjustments:
adjustments:
depreciation
depreciation
changes
changesininworking
workingcapital:
capital:
change
changeininaccounts
accountsreceivable
receivable
change
changeinininventories
inventories
change
changeininaccounts
accountspayable
payable
($95,136)
($95,136)
116,960
116,960
-280,960
-280,960
-572,160
-572,160
178,400
178,400
change
changeininaccruals
accruals
Net
Netcash
cashprovided
providedby
byoperating
operatingactivities
activities
148,960
148,960
($503,936)
($503,936)
Long-term
Long-terminvesting
investingactivities
activities
Cash
Cashused
usedtotoacquire
acquirefixed
fixedassets
assets
($711,950)
($711,950)
Financing
Financingactivities
activities
change
changeininshort
shortterm
terminvestments
investments
change
changeininnotes
notespayable
payable
change
changeininlong-term
long-termdebt
debt
change
in
common
stock
change in common stock
payment
paymentofofcash
cashdividends
dividends
Net
Netcash
cashprovided
providedby
byfinancing
financingactivities
activities
$28,600
$28,600
$520,000
$520,000
$676,568
$676,568
$$
-($11,000)
($11,000)
$1,214,168
$1,214,168
Answer
FCF is the amount of cash available from
operations for distribution to all investors.
A companys value depends upon the amount of
FCF it can generate.
1. Pay interest on debt.
2. Pay back principal on debt.
3. Pay dividends.
4. Buy back stock.
5. Buy nonoperating assets
Answer
Assets
Assets
Cash
Cash
Short-term
Short-terminvestments.
investments.
Accounts
Accountsreceivable
receivable
Inventories
Inventories
total
totalcurrent
currentassets
assets
Gross
Grossfixed
fixedassets
assets
Less:
Less:accumulated
accumulated
depreciation
depreciation
net
netfixed
fixedassets
assets
Total
Totalassets
assets
2003
2003
$9,000
$9,000
48,600
48,600
351,200
351,200
715,200
715,200
$1,124,000
$1,124,000
491,000
491,000
146,200
146,200
2004
2004
$7,282
$7,282
20,000
20,000
632,160
632,160
1,287,360
1,287,360
$1,946,802
$1,946,802
1,202,950
1,202,950
263,160
263,160
$344,800
$344,800
$1,468,800
$1,468,800
$939,790
$939,790
$2,886,592
$2,886,592
Liabilities
Liabilitiesand
andequity
equity
Accounts
Accountspayable
payable
Notes
Notespayable
payable
Accruals
Accruals
total
totalcurrent
currentliabilities
liabilities
Long-term
Long-termdebt
debt
Common
Commonstock
stock(100,000
(100,000
shares)
shares)
Retained
Retainedearnings
earnings
total
totalequity
equity
Total
Totalliabilities
liabilitiesand
andequity
equity
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000
720,000
720,000
284,960
284,960
$1,328,960
$1,328,960
1,000,000
1,000,000
460,000
460,000
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632
$557,632
$557,632
$2,886,592
$2,886,592
2003
2003
$9,000
$9,000
48,600
48,600
351,200
351,200
715,200
715,200
$1,124,000
$1,124,000
491,000
491,000
146,200
146,200
2004
2004
$7,282
$7,282
20,000
20,000
632,160
632,160
1,287,360
1,287,360
$1,946,802
$1,946,802
1,202,950
1,202,950
263,160
263,160
$344,800
$344,800
$1,468,800
$1,468,800
$939,790
$939,790
$2,886,592
$2,886,592
2003
2003
$145,600
$145,600
200,000
200,000
136,000
136,000
$481,600
$481,600
323,432
323,432
460,000
460,000
2004
2004
$324,000
$324,000
720,000
720,000
284,960
284,960
$1,328,960
$1,328,960
1,000,000
1,000,000
460,000
460,000
203,768
203,768
$663,768
$663,768
$1,468,800
$1,468,800
97,632
97,632
$557,632
$557,632
$2,886,592
$2,886,592
NOWC= 793,800
2004
2003
2003
2003
$9,000
$9,000
48,600
48,600
351,200
351,200
715,200
715,200
$1,124,000
$1,124,000
491,000
491,000
146,200
146,200
2004
2004
$7,282
$7,282
20,000
20,000
632,160
632,160
1,287,360
1,287,360
$1,946,802
$1,946,802
1,202,950
1,202,950
263,160
263,160
$344,800
$344,800
$1,468,800
$1,468,800
$939,790
$939,790
$2,886,592
$2,886,592
NOWC= 1,317,842
2003
2003
$3,432,000
$3,432,000
2,864,000
2,864,000
340,000
340,000
18,900
18,900
$3,222,900
$3,222,900
$209,100
$209,100
62,500
62,500
$146,600
$146,600
58,640
58,640
$87,960
$87,960
2004
2004
$5,834,400
$5,834,400
4,980,000
4,980,000
720,000
720,000
116,960
116,960
$5,816,960
$5,816,960
$17,440
$17,440 (1-0.4)
176,000
176,000 NOPAT= 10,464
($158,560)
($158,560)
-63,424
-63,424
($95,136)
($95,136)
2,257,632 1,138,600
=1,119,032
FCF = 10,464 1,119,032
= - 1,108,568
NOPAT
_________________________
ROIC =
Total net operating capital
10,464
__________
ROIC =
= 0.5%
2,257,632
ROIC = 11%
2004
2003
2004
= 11,600
2003