Financial Statements of Computron, Inc. 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 the complaints of some parents about the effect of video games on their kids’ social lives and academic performance.
The company recently hired Jenny Cochran, a graduate of UC, to assist the chairman of the board in turning around 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 prices. Cochran believes that undertaking such capital budgeting projects would increase sales, net income, and free cash flows to boost the stock price. APA
The corporate tax rate is 40%.
The following financial statements 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 |
- Explain to the chairman of the board three properties of future cashflows that would likely help increase Computron’s value.
- What is Computron’s net operating profit after taxes (NOPAT) for 2020?
- Calculate Computron’s free cash flow for 2020 if its net investment in total operating capital is $671,419.
- Explain to the chairman of the board five uses of free cash flow to help maximize the value of the firm.
- 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%. Financial Statements of Computron, Inc.
- Calculate the following profitability ratios for Computron in 2020:
- Operating profit margin
- Return on assets (ROA)
- Return on equity (ROE)
- Basic Earning Power (BEP)
- Calculate the following asset management ratios for Computron in 2020:
- total assets turnover
- Days sales outstanding (DSO)
- Calculate the following liquidity and debt management ratios for Computron in 2020:
- Current ratio
- Quick ratio
- Debt-to-assets ratio
- Times-interest-earned ratio
- Given the following industry ratios for 2020, how do you evaluate the financial performance of Computron (poor or better) and explain?
| a. Operating profit margin | 7.20% |
| b. Basic Earning Power | 15.60% |
| c. ROE | 15.40% |
Financial Statements of Computron, Inc.
