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Chapter 3 Mini Case

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10 Computron's Income Statement
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INCOME STATEMENT
Net sales
Cost of Goods Sold
Other Expenses
Depreciation
Total Operating Costs
Earnings before interest and taxes (EBIT)
Less interest
Earnings before taxes (EBT)
Taxes (40%)
Net Income
Tax rate

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2006

2007

########
########
$340,000
$18,900
########
$209,100
$62,500
$146,600
$58,640
$87,960

########
########
$720,000
$116,960
########
$17,440
$176,000
-$158,560
-$63,424
-$95,136

40%

40%

a. (1.) What effect did the expansion have on sales and net income?
Statement of Retained Earnings
The statement of retained earnings takes the previous year's balance of retained earnings, adds the current year's net income,
and then subtracts dividends paid to common stockholders. The end result is the new balance of retained earnings.
Computron's statement is shown below:
2007
Balance of Retained Earnings, Dec. 31, 2006
########
Add: Net Income, 2007
########
Less: Dividends to common stockholders
########
Balance of Retained Earnings, Dec. 31, 2007
$97,632.0

41 Computron's Balance Sheets


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2006

2007

Assets
Cash and equivalents
Short-term investments
Accounts receivable
Inventories
Total current assets
Gross fixed assets
Less: Accumulated depreciation
Net plant and equipment
Total assets

$9,000
$48,600
$351,200
$715,200
########
$491,000
$146,200
$344,800
########

$7,282
$20,000
$632,160
########
########
########
$263,160
$939,790
########

Liabilities and equity


Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
Common Stock
Retained Earnings
Total Equity
Total Liabilites and Equity

$145,600 $324,000
$200,000 $720,000
$136,000 $284,960
$481,600 ########
$323,432 ########
$460,000 $460,000
$203,768 $97,632
$663,768 $557,632
######## ########

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66 a. (2.) What effect did the expansion have on the asset side of the balance sheet?
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68 Information from the balance sheet and income statement can be used to construct the Statement of Cash Flows, which is
69 shown below for Computron.
70 Computron's Statement of Cash Flows

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2007
Operating Activities
Net Income before preferred dividends
Noncash adjustments
Depreciation and amortization
Due to changes in working capital
Change in accounts receivable
Change in inventories
Change in accounts payable
Change in accruals
Net cash provided by operating activities

($280,960)
($572,160)
$178,400
$148,960
($503,936)

Investing activities
Cash used to acquire fixed assets
Change in short-term investments
Net cash provided by investing activities

($711,950)
$28,600
($683,350)

Financing Activities
Change in notes payable
Change in long-term debt
Payment of cash dividends
Net cash provided by financing activities

$520,000
$676,568
($11,000)
########

Net change in cash and equivilents


Cash and securities at beginning of the year
Cash and securities at end of the year

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101 b. What do you conclude from the statement of cash flows?
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($95,136)
$116,960

($1,718)
$9,000
$7,282

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c. What are operating current assets? What are operating current liabilities? How much net operating working capital and
total net operating capital does Computron have?
Net Operating Working Capital
Those current assets used in operations are called operating current assets, and the current liabilities that result from
operations are called operating current liabilities. Net operating working capital is equal to operating current assets minus
operating current liabilities.
Operating
current
assets
= $1,926,802
= $1,317,842

NOWC07 =
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Operating current liabilities

$608,960

Operating current liabilities

$281,600

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Operating
current
assets
= $1,075,400
= $793,800

NOWC06 =
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121 Total Net Operating Capital
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The Total OperatingCapital is Net Operating Working Capital plus any fixed assets.
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124 TOC07 =
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=
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NOWC
$1,317,842
$2,257,632

+
+

Fixed assets
$939,790

NOWC
$793,800
$1,138,600

+
+

Fixed assets
$344,800

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128 TOC06 =
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130

=
=

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132 d. What is free cash flow? Why is it important? What are the five uses of FCF?
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134 e. What are Computrons net operating profit after taxes (NOPAT) and free cash flow (FCF)?
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136 Net Operating Profit After Taxes
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NOPAT is the amount of profit Computron would generate if it had no debt and held no financial assets.
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139 NOPAT07 =
EBIT
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= $17,440

x
x

(1-T)
60%

x
x

(1-T)
60%

= $10,464

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143 NOPAT06 =
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EBIT
= $209,100
= $125,460

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147 Free Cash Flow
148 Computron's Free Cash Flow caluclation is the cash flow actually availabe for distribution to investors after the company has
149 made all necessary investments in fixed assets and working capital to sustain ongoing operations.
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151 FCF07 =
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=
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NOPAT
$10,464.0
-$1,108,568

Net Investment in Operating Capital


$1,119,032

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155 f. Calculate Computrons return on invested capital. Computron has a 10% cost of capital (WACC). Do you think Computrons
156 growth added value?

2006
10%

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158 Cost of Capital (WACC)


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161 Return on Invested Capital
162 The Return on Invested Capital tells us the amount of NOPAT per dollar of operating capital.
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164 ROIC07 =
165
=

NOPAT
$10,464.0
=
0.5%

Operating Capital
$2,257,632

168 ROIC06 =
NOPAT
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= $125,460.0

Operating Capital
$1,138,600

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2007
10%

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g. What is Computron's EVA? The after-tax cost of capital was 10 percent in both years.

Economic Value Added


Economic Value Added represents Computron's residual income that remains after the cost of all capital, including equity
capital, has been deducted.

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11.0%

=
=
=

NOPAT
$10,464
$10,464
-$215,299

Operating Capital
x
$2,257,632

NOPAT
$125,460
$125,460
$11,600

Operating Capital
x
$1,138,600

x
########

WACC
10%

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=
=
=

x
########

WACC
10%

h. What happened to Computron's market value added (MVA)?


Year-end common stock price
Year-end shares outstanding (in millions)
Earnings per share (EPS)
Dividends per share (DPS)

$8.50
100,000
($0.95)
$0.11

$6.00
100,000
$0.88
$0.22

Market Value Added


Assume that the market value of debt is equal to the book value of debt. In this case, Market Value Added (MVA) is the
difference between the market value of Computron's stock and the amount of equity capital supplied by shareholders.

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=
=
=

Stock price
$6.00

x
x
$600,000

# of shares
100,000

Total common equity


$557,632
$557,632

x
x
$850,000

# of shares
100,000

Total common equity


$663,768
$663,768

$42,368

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206 MVA06 =
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208
209

=
=
=

Stock price
$8.50
$186,232

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