Explain to the chairman of board five uses of free cash flow

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Reference no: EM133654612

Assignment: Managerial Finance

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

1. Explain to the chairman of the board three properties of future cashflows that would likely help increase Computron's value.

2. What is Computron's net operating profit after taxes (NOPAT) for 2020?

3. Calculate Computron's free cash flow for 2020 if net investment in total operating capital is $671,419.

4. Explain to the chairman of the board five uses of free cash flow to help maximize the value of the firm.

5. 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%.

6. Calculate the following profitability ratios for Computron in 2020:

a. Operating profit margin
b. Return on assets (ROA)
c. Return on equity (ROE)
d. Basic Earning Power (BEP)

7. Calculate the following asset management ratios for Computron in 2020:

a. total assets turnover
b. Days sales outstanding (DSO)

8. Calculate the following liquidity and debt management ratios for Computron in 2020:

a. Current ratio
b. Quick ratio
c. Debt-to-assets ratio
d. Times-interest earned ratio

9. Given the following industry ratios for 2020, how do you evaluate the financial performance of Computron (poor or better) and explain:

Operating profit margin	7.20%
Basic Earning Power	15.60%
ROE	15.40%
Return on Assets	10.80%
Total Assets turnover	1.5
Days sales outstanding	28.00
Current ratio	2.50
Quick ratio	1.90
Debt-to-assets ratio	15%
Times-interest-earned	13.00

10. 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%.

Reference no: EM133654612

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