Problem set 2
Dilli Bista, MBA is the financial manager for Computron Inc. a large 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. Despite a huge investment made last three years in fixed assets, 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. Dilli is analyzing the company’s financial statements and annual reports to determine the financial performance of the company for the year and see how the performance can be improved.
Dilli noticed that last year the company had $4 million in operating income (EBIT). The company had a depreciation expense of $1 million and an interest expense of $1 million. The company’s tax rate is 25%. The company has $14 million in operating current assets and $4 million in operating current liabilities and has $15 million in net plant and equipment. The company has after-tax cost of capital of 10%.
1. List four types of financial statements that the company’s annual report typically include. State three items that can be found in each of the financial statement of Computron Inc.
2. Determine Computron’s net income for the year. Show your calculations.
3. What was Computron’s net cash flow?
4. What was Computron’s net operating profit after taxes (NOPAT)?
5. Calculate net operating working capital and total net operating capital for the year.
6. Calculate Computron’s free cash flow for the year if net operating capital in the previous year was $24 million.
7. Explain to the chairman of the board five uses of free cash flow that can help maximize the value of the firm.
8. Explain Economic Value Added (EVA) and compute Computron’s EVA if total net operating capital is $25 million? The company’s after-tax cost of capital is 10.0%.
9. Compute and explain market value added (MVA) for Computron using the following information:
i. total number of shares outstanding is 2 million
ii. current stock price is $35 per share
iii. total common equity is $68.2 million
10. Calculate the company’s return on invested capital (ROIC). Do you think Computron’s growth added value?
Submit your answers in a Word document.