, A B C D E F G
1
2
3 Chapter 2 Mini Case
4
5 Situation
6
7 Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as
8 assistant to the chairman of the board of Computron Industries, a manufacturer of computer components.
9
10 During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched
11 an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial
12 statements and other data.
13
, A B C D E F G
14 Computron's Income Statement
15
16 2015 2016
17 INCOME STATEMENT
18 Net sales $ 3,432,000 $ 5,834,400
19 Cost of Goods Sold Except Depr. 2,864,000 4,980,000
20 Depreciation and amortization 18,900 116,960
21 Other Operating Expenses 340,000 720,000
22 Total Operating Costs $ 3,222,900 $ 5,816,960
23 Earnings before interest and taxes (EBIT) $ 209,100 $ 17,440
24 Less interest 62,500 176,000
25 Pre-tax earnings $ 146,600 $ (158,560)
26 Taxes (40%) 58,640 (63,424)
27 Net Income $ 87,960 $ (95,136)
28
29
30 Dividends $22,000 $11,000
31 Tax rate 40% 40%
32
33
a. (1.) What effect did the expansion have on sales and net income? Answer: See Mini Case Show.
34
35
36 Computron's Balance Sheets
37
38 2015 2016
39 Assets
40 Cash and equivalents $ 9,000 $ 7,282
41 Short-term investments 48,600 20,000
42 Accounts receivable 351,200 632,160
43 Inventories 715,200 1,287,360
44 Total current assets $ 1,124,000 $ 1,946,802
45 Gross fixed assets $ 491,000 $ 1,202,950
46 Less: Accumulated depreciation 146,200 263,160
47 Net plant and equipment $ 344,800 $ 939,790
48 Total assets $ 1,468,800 $ 2,886,592
49
50 Liabilities and equity
51 Accounts payable $ 145,600 $ 324,000
52 Notes payable 200,000 720,000
53 Accruals 136,000 284,960
54 Total current liabilities $ 481,600 $ 1,328,960
55 Long-term bonds $ 323,432 $ 1,000,000
56 Common Stock 460,000 460,000
57 Retained Earnings 203,768 97,632
58 Total Equity $ 663,768 $ 557,632
59 Total Liabilites and Equity $ 1,468,800 $ 2,886,592
60
61
62
63 a. (2.) What effect did the expansion have on the asset side of the balance sheet? Answer: See Mini Case Show
64
65 Computron's Statement of Cash Flows
66
67 2016
68 Operating Activities
69 Net Income before preferred dividends $ (95,136)
70 Noncash adjustments
71 Depreciation and amortization 116,960
72 Due to changes in working capital
73 Change in accounts receivable (280,960)
74 Change in inventories (572,160)
75 Change in accounts payable 178,400
, A B C D E F G
76 Change in accruals 148,960
77 Net cash provided by operating activities $ (503,936)
78
79 Investing activities
80 Cash used to acquire fixed assets $ (711,950)
81 Change in short-term investments 28,600
82 Net cash provided by investing activities $ (683,350)
83
84 Financing Activities
85 Change in notes payable $ 520,000
86 Change in long-term debt 676,568
87 Payment of cash dividends (11,000)
88 Net cash provided by financing activities $1,185,568
89
90 Net change in cash and equivilents $ (1,718)
91 Cash and securities at beginning of the year 9,000
92 Cash and securities at end of the year $ 7,282
93
94
95 b. What do you conclude from the statement of cash flows? Answer: See Mini Case Show.
96
97 c. What is free cash flow? Why is it important? What are the five uses of FCF? Answer: See Mini Case Show.
98
99 d. What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current
100 liabilities? How much net operating working capital and total net operating capital does Computron have?
101
102 Net Operating Profit After Taxes
103
104 NOPAT is the amount of profit Computron would generate if it had no debt and held no financial assets.
105
106 2016 NOPAT = EBIT x (1-T)
107 = $17,440 x 60%
108 = $10,464
109
110 2015 NOPAT = EBIT x (1-T)
111 = $209,100 x 60%
112 = $125,460
113
114
115 Net Operating Working Capital
116
117 Those current assets used in operations are called operating current assets, and the current liabilities that result from operations are
118 called operating current liabilities. Net operating working capital is equal to operating current assets minus operating current
119 liabilities.
120
Operating
Operating
121 - current
current assets
2016 NOWC = liabilities
122 = $1,926,802 - $608,960
123 = $1,317,842
124
Operating
Operating
125 - current
current assets
2015 NOWC = liabilities
126 = $1,075,400 - $281,600
127 = $793,800
128
129 Total Net Operating Capital
130 The Total OperatingCapital is Net Operating Working Capital plus any fixed assets.
131
132 2016 TOC = NOWC + Fixed assets
133 = $1,317,842 + $939,790
1
2
3 Chapter 2 Mini Case
4
5 Situation
6
7 Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as
8 assistant to the chairman of the board of Computron Industries, a manufacturer of computer components.
9
10 During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched
11 an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial
12 statements and other data.
13
, A B C D E F G
14 Computron's Income Statement
15
16 2015 2016
17 INCOME STATEMENT
18 Net sales $ 3,432,000 $ 5,834,400
19 Cost of Goods Sold Except Depr. 2,864,000 4,980,000
20 Depreciation and amortization 18,900 116,960
21 Other Operating Expenses 340,000 720,000
22 Total Operating Costs $ 3,222,900 $ 5,816,960
23 Earnings before interest and taxes (EBIT) $ 209,100 $ 17,440
24 Less interest 62,500 176,000
25 Pre-tax earnings $ 146,600 $ (158,560)
26 Taxes (40%) 58,640 (63,424)
27 Net Income $ 87,960 $ (95,136)
28
29
30 Dividends $22,000 $11,000
31 Tax rate 40% 40%
32
33
a. (1.) What effect did the expansion have on sales and net income? Answer: See Mini Case Show.
34
35
36 Computron's Balance Sheets
37
38 2015 2016
39 Assets
40 Cash and equivalents $ 9,000 $ 7,282
41 Short-term investments 48,600 20,000
42 Accounts receivable 351,200 632,160
43 Inventories 715,200 1,287,360
44 Total current assets $ 1,124,000 $ 1,946,802
45 Gross fixed assets $ 491,000 $ 1,202,950
46 Less: Accumulated depreciation 146,200 263,160
47 Net plant and equipment $ 344,800 $ 939,790
48 Total assets $ 1,468,800 $ 2,886,592
49
50 Liabilities and equity
51 Accounts payable $ 145,600 $ 324,000
52 Notes payable 200,000 720,000
53 Accruals 136,000 284,960
54 Total current liabilities $ 481,600 $ 1,328,960
55 Long-term bonds $ 323,432 $ 1,000,000
56 Common Stock 460,000 460,000
57 Retained Earnings 203,768 97,632
58 Total Equity $ 663,768 $ 557,632
59 Total Liabilites and Equity $ 1,468,800 $ 2,886,592
60
61
62
63 a. (2.) What effect did the expansion have on the asset side of the balance sheet? Answer: See Mini Case Show
64
65 Computron's Statement of Cash Flows
66
67 2016
68 Operating Activities
69 Net Income before preferred dividends $ (95,136)
70 Noncash adjustments
71 Depreciation and amortization 116,960
72 Due to changes in working capital
73 Change in accounts receivable (280,960)
74 Change in inventories (572,160)
75 Change in accounts payable 178,400
, A B C D E F G
76 Change in accruals 148,960
77 Net cash provided by operating activities $ (503,936)
78
79 Investing activities
80 Cash used to acquire fixed assets $ (711,950)
81 Change in short-term investments 28,600
82 Net cash provided by investing activities $ (683,350)
83
84 Financing Activities
85 Change in notes payable $ 520,000
86 Change in long-term debt 676,568
87 Payment of cash dividends (11,000)
88 Net cash provided by financing activities $1,185,568
89
90 Net change in cash and equivilents $ (1,718)
91 Cash and securities at beginning of the year 9,000
92 Cash and securities at end of the year $ 7,282
93
94
95 b. What do you conclude from the statement of cash flows? Answer: See Mini Case Show.
96
97 c. What is free cash flow? Why is it important? What are the five uses of FCF? Answer: See Mini Case Show.
98
99 d. What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current
100 liabilities? How much net operating working capital and total net operating capital does Computron have?
101
102 Net Operating Profit After Taxes
103
104 NOPAT is the amount of profit Computron would generate if it had no debt and held no financial assets.
105
106 2016 NOPAT = EBIT x (1-T)
107 = $17,440 x 60%
108 = $10,464
109
110 2015 NOPAT = EBIT x (1-T)
111 = $209,100 x 60%
112 = $125,460
113
114
115 Net Operating Working Capital
116
117 Those current assets used in operations are called operating current assets, and the current liabilities that result from operations are
118 called operating current liabilities. Net operating working capital is equal to operating current assets minus operating current
119 liabilities.
120
Operating
Operating
121 - current
current assets
2016 NOWC = liabilities
122 = $1,926,802 - $608,960
123 = $1,317,842
124
Operating
Operating
125 - current
current assets
2015 NOWC = liabilities
126 = $1,075,400 - $281,600
127 = $793,800
128
129 Total Net Operating Capital
130 The Total OperatingCapital is Net Operating Working Capital plus any fixed assets.
131
132 2016 TOC = NOWC + Fixed assets
133 = $1,317,842 + $939,790
