Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components. During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached) 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
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
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Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components.
During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached)
  1. What caused the decline in the ROIC?
  2. Was it due to operating profitability or capital utilization?
  3. Do you think Computron’s growth added value?
  4. What is Computron's EVA?  The cost of capital was 10% in both years.
  5. Assume that a corporation has $200,000 of taxable income from operations. What is the company's federal tax liability?
  6. 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?
  7. At what marginal tax rate would you be indifferent?
Computron's Income Statement
2019
2020
INCOME STATEMENT
Net sales
$
2,059,200
$
3,500,640
Cost of Goods Sold (Except depr. and amort.)
Other Expenses
$
1,718,400
$
2,988,000
$
204,000
$
432,000
Depreciation and amortization
$
11,340
$
70,176
3,490,176
Total Operating Costs
Earnings before interest and taxes (EBIT)
$
1,933,740
$
$
125,460
$
10,464
Less interest
$
37,500
$
105,600
Pre-tax earnings
Taxes (40%)
Net Income
$4
87,960
$
(95,136)
35,184
$
(38,054)
2$
52,776
$
(57,082)
Dividends
$
13,200
$
6,600
Tax 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
$
772,416
Total current assets
$
674,400
$
1,168,081
Gross fixed assets
2$
294,600
$
721,770
Less: Accumulated depreciation
$
87,720
2$
157,896
Net plant and equipment
$
206,880
563,874
Total assets
$
881,280
$
1,731,955
Liabilities and equity
Асcounts payable
Notes payable
$
87,360
$
194,400
$
120,000
$
432,000
81,600
170,976
797,376
Accruals
$
$
Total current liabilities
$
288,960
$
Long-term bonds
Common Stock
Retained Earnings
Total Equity
$
194,059
$
600,000
$
276,000
$
276,000
$
122,261
2$
58,579
$
398,261
$
334,579
Total Liabilites and Equity
$
881,280
$
1,731,955
Transcribed Image Text:Computron's Income Statement 2019 2020 INCOME STATEMENT Net sales $ 2,059,200 $ 3,500,640 Cost of Goods Sold (Except depr. and amort.) Other Expenses $ 1,718,400 $ 2,988,000 $ 204,000 $ 432,000 Depreciation and amortization $ 11,340 $ 70,176 3,490,176 Total Operating Costs Earnings before interest and taxes (EBIT) $ 1,933,740 $ $ 125,460 $ 10,464 Less interest $ 37,500 $ 105,600 Pre-tax earnings Taxes (40%) Net Income $4 87,960 $ (95,136) 35,184 $ (38,054) 2$ 52,776 $ (57,082) Dividends $ 13,200 $ 6,600 Tax 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 $ 772,416 Total current assets $ 674,400 $ 1,168,081 Gross fixed assets 2$ 294,600 $ 721,770 Less: Accumulated depreciation $ 87,720 2$ 157,896 Net plant and equipment $ 206,880 563,874 Total assets $ 881,280 $ 1,731,955 Liabilities and equity Асcounts payable Notes payable $ 87,360 $ 194,400 $ 120,000 $ 432,000 81,600 170,976 797,376 Accruals $ $ Total current liabilities $ 288,960 $ Long-term bonds Common Stock Retained Earnings Total Equity $ 194,059 $ 600,000 $ 276,000 $ 276,000 $ 122,261 2$ 58,579 $ 398,261 $ 334,579 Total Liabilites and Equity $ 881,280 $ 1,731,955
Computron's Statemei. of Cash Flows
2020
Operating Activities
Net Income before preferred dividends
(57,081.60)
Noncash adjustments
Depreciation and amortization
Due to changes in working capital
70,176.00
Change in accounts receivable
S
(168,576.00)
Change in inventories
Change in accounts payable
Change in aceruals
Net cash provided by operating activities
(343,296.00)
107,040.00
89,376.00
(302,361.60)
Investing activities
Cash used to acquire fixed assets
Change in short-term investments
Net cash provided by investing activities
(427,170.00)
17,160.00
(410,010.00)
Financing Activities
Change in notes payable
Change in long-term debt
Payment of cash dividends
Net cash provided by financing activities
312,000.00
405,940.80
S
(6,600.00)
711,340.80
Net change in cash and equivilents
(1,030.80)
Cash and securities at beginning of the year
5,400.00
Cash and securities at end of the year
4,369.20
Corporate Tax Rates
Plus this
percentage on the
excess over the
It pays this amount on
the base of the bracket:
If a corporation's taxable income is between:
base
(1)
(2)
(3)
(4)
$o
$50,000
SO
15.0%
$50,000 7
$75,000 /
$75,000
$7,500
25.0%
$100,000
$13,750
34.0%
$100,000
$335,000
$22,250
39.0%
$335,000
$10,000,000
$113,900
34.0%
S10,000,000
35.0%
$15,000,000
$18,333,333
$3,400,000
$15,000,000
$5,150,000
38.0%
S18,333,333
and up
$6,416,667
35.0%
Transcribed Image Text:Computron's Statemei. of Cash Flows 2020 Operating Activities Net Income before preferred dividends (57,081.60) Noncash adjustments Depreciation and amortization Due to changes in working capital 70,176.00 Change in accounts receivable S (168,576.00) Change in inventories Change in accounts payable Change in aceruals Net cash provided by operating activities (343,296.00) 107,040.00 89,376.00 (302,361.60) Investing activities Cash used to acquire fixed assets Change in short-term investments Net cash provided by investing activities (427,170.00) 17,160.00 (410,010.00) Financing Activities Change in notes payable Change in long-term debt Payment of cash dividends Net cash provided by financing activities 312,000.00 405,940.80 S (6,600.00) 711,340.80 Net change in cash and equivilents (1,030.80) Cash and securities at beginning of the year 5,400.00 Cash and securities at end of the year 4,369.20 Corporate Tax Rates Plus this percentage on the excess over the It pays this amount on the base of the bracket: If a corporation's taxable income is between: base (1) (2) (3) (4) $o $50,000 SO 15.0% $50,000 7 $75,000 / $75,000 $7,500 25.0% $100,000 $13,750 34.0% $100,000 $335,000 $22,250 39.0% $335,000 $10,000,000 $113,900 34.0% S10,000,000 35.0% $15,000,000 $18,333,333 $3,400,000 $15,000,000 $5,150,000 38.0% S18,333,333 and up $6,416,667 35.0%
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