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Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value? What is Computron's EVA?  The cost of capital was 10% in both years. Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability? Assume that you are in the 25% marginal tax bracket and that you have $50,000 to invest. You have narrowed your investment choices down to municipal bonds yielding 7% or equally risky corporate bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent?

Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value? What is Computron's EVA?  The cost of capital was 10% in both years. Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability? Assume that you are in the 25% marginal tax bracket and that you have $50,000 to invest. You have narrowed your investment choices down to municipal bonds yielding 7% or equally risky corporate bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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  1. Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value?
  2. What is Computron's EVA?  The cost of capital was 10% in both years.
  3. Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability?
  4. Assume that you are in the 25% marginal tax bracket and that you have $50,000 to invest. You have narrowed your investment choices down to municipal bonds yielding 7% or equally risky corporate bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent?
Computron's Income Statement 2019 2020 INCOME STATEMENT Net sales Cost of Goods Sold (Except depr. and amort.) 2,059,200 3,500,640 1,718,400 2,988,000 Other Expenses 204,000 432,000 Depreciation and amort zation Total Operating Costs Earnings before interestand taxes (EBIT) Less interest 11,340 70,176 1,933,740 3,490,176 125,460 10,464 37,500 105,600 Pre-tax earnings 87,960 -95,136 Taxes (40%) 35,184 -38,054.4 Net Income 52,776 -57,081.6 Dividends 13,200 6,600 Тах rate 40% 40% Computron's Balance Sheets 2019 2020 Assets Cash and equivalents Short-term investments 5,400 4,369.2 29,160 12,000 Accounts receivable 210,720 379,296 Inventories 429,120 72,416ר Total current assets 674,400 1,168,081.2 Gross fixed assets 294,600 721,770 Less: Accumulated depreciation Net plant and equipmen Total assets 87,720 157,896 206,880 563,874 881,280 1,731,955.2 Liabilities and equity Accounts payable Notes payable 87,360 194,400 120,000 432,000 Accruals 81,600 170,976 Total current liabilities 288,960 797,376 Long-term bonds Common Stock Retained Earnings 194,059.2 600,000 276,000 276,000 122,260.8 58,579.2 Total Equity 398,260.8 334,579.2 Total Liabilites and Equity 881,280 1,731,955.2
Transcribed Image Text:Computron's Income Statement 2019 2020 INCOME STATEMENT Net sales Cost of Goods Sold (Except depr. and amort.) 2,059,200 3,500,640 1,718,400 2,988,000 Other Expenses 204,000 432,000 Depreciation and amort zation Total Operating Costs Earnings before interestand taxes (EBIT) Less interest 11,340 70,176 1,933,740 3,490,176 125,460 10,464 37,500 105,600 Pre-tax earnings 87,960 -95,136 Taxes (40%) 35,184 -38,054.4 Net Income 52,776 -57,081.6 Dividends 13,200 6,600 Тах rate 40% 40% Computron's Balance Sheets 2019 2020 Assets Cash and equivalents Short-term investments 5,400 4,369.2 29,160 12,000 Accounts receivable 210,720 379,296 Inventories 429,120 72,416ר Total current assets 674,400 1,168,081.2 Gross fixed assets 294,600 721,770 Less: Accumulated depreciation Net plant and equipmen Total assets 87,720 157,896 206,880 563,874 881,280 1,731,955.2 Liabilities and equity Accounts payable Notes payable 87,360 194,400 120,000 432,000 Accruals 81,600 170,976 Total current liabilities 288,960 797,376 Long-term bonds Common Stock Retained Earnings 194,059.2 600,000 276,000 276,000 122,260.8 58,579.2 Total Equity 398,260.8 334,579.2 Total Liabilites and Equity 881,280 1,731,955.2
Computron's Income Statement 2019 2020 INCOME STATEMENT Net sales Cost of Goods Sold (Except depr. and amort.) 2,059,200 3,500,640 1,718,400 2,988,000 Other Expenses 204,000 432,000 Depreciation and amort zation Total Operating Costs Earnings before interestand taxes (EBIT) Less interest 11,340 70,176 1,933,740 3,490,176 125,460 10,464 37,500 105,600 Pre-tax earnings 87,960 -95,136 Taxes (40%) 35,184 -38,054.4 Net Income 52,776 -57,081.6 Dividends 13,200 6,600 Тах rate 40% 40% Computron's Balance Sheets 2019 2020 Assets Cash and equivalents Short-term investments 5,400 4,369.2 29,160 12,000 Accounts receivable 210,720 379,296 Inventories 429,120 72,416ר Total current assets 674,400 1,168,081.2 Gross fixed assets 294,600 721,770 Less: Accumulated depreciation Net plant and equipmen Total assets 87,720 157,896 206,880 563,874 881,280 1,731,955.2 Liabilities and equity Accounts payable Notes payable 87,360 194,400 120,000 432,000 Accruals 81,600 170,976 Total current liabilities 288,960 797,376 Long-term bonds Common Stock Retained Earnings 194,059.2 600,000 276,000 276,000 122,260.8 58,579.2 Total Equity 398,260.8 334,579.2 Total Liabilites and Equity 881,280 1,731,955.2
Transcribed Image Text:Computron's Income Statement 2019 2020 INCOME STATEMENT Net sales Cost of Goods Sold (Except depr. and amort.) 2,059,200 3,500,640 1,718,400 2,988,000 Other Expenses 204,000 432,000 Depreciation and amort zation Total Operating Costs Earnings before interestand taxes (EBIT) Less interest 11,340 70,176 1,933,740 3,490,176 125,460 10,464 37,500 105,600 Pre-tax earnings 87,960 -95,136 Taxes (40%) 35,184 -38,054.4 Net Income 52,776 -57,081.6 Dividends 13,200 6,600 Тах rate 40% 40% Computron's Balance Sheets 2019 2020 Assets Cash and equivalents Short-term investments 5,400 4,369.2 29,160 12,000 Accounts receivable 210,720 379,296 Inventories 429,120 72,416ר Total current assets 674,400 1,168,081.2 Gross fixed assets 294,600 721,770 Less: Accumulated depreciation Net plant and equipmen Total assets 87,720 157,896 206,880 563,874 881,280 1,731,955.2 Liabilities and equity Accounts payable Notes payable 87,360 194,400 120,000 432,000 Accruals 81,600 170,976 Total current liabilities 288,960 797,376 Long-term bonds Common Stock Retained Earnings 194,059.2 600,000 276,000 276,000 122,260.8 58,579.2 Total Equity 398,260.8 334,579.2 Total Liabilites and Equity 881,280 1,731,955.2
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