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Assignment – Problem Set 1
Devesh Sushilkumar Bachhawat
Executive MBA, University of Cumberlands
BADM534-B02: Managerial Finance
Dr. Debra Touhey
July 1, 2022
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Assignment – Problem Set 1
a. Explain to the chairman of the board three properties of future cashflows that
would likely help increase Computron’s value.
Ans.
The three properties of company’s cash flow are: 1) sales revenue, 2) operating costs and
taxes, and 3) required new investments in operating capital. The financial manager can
manage the proportions of these factors carefully to create a stable and predictable cash flow
for a company.
b. What is Computron’s net operating profit after taxes (NOPAT) for 2020?
Ans.
NOPAT = EBIT*(1-Tax Rate)
NOPAT = $10,464 *(1-0.40)
NOPAT = $6,278.40
c. Calculate Computron’s free cash flow for 2020 if net investment in total operating
capital is $671,419.
Ans.
FCF = NOPAT – Net investment in operating capital
= $6,278.40 - $671,419
= ($665,140.6)
d. Explain to the chairman of the board five uses of free cash flow to help maximize the
value of the firm.
Ans.
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Free cash flow is the cash that a company generates after it has met all its operating expenses
and the CAPEX to support the same. So based on the above definition, the cash can be used
for the following purposes:
i. Buying or acquiring new companies
ii. Repayment of debt
iii. Reinvesting in the company for reducing outside finance
iv. Stock repurchases
v. Paying dividends to shareholders
e. 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%.
Ans.
Economic Value Added = NOPAT - (WACC*Amt.Invested, ie. Net operating Capital)
Economic Value Added = $6,278.40 – (0.10 * $1,354,579)
Economic Value Added = $6,278.40 - $135,457.9
Economic Value Added = ($129,179.50)
f. Calculate the following profitability ratios for Computron in 2020:
i. Operating profit margin
ii. Return on assets (ROA)
iii. Return on equity (ROE)
iv. Basic Earning Power (BEP)
Ans.
i. Operating profit margin
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Operating profit margin = Operating Income (EBIT) / Net Sales
Operating profit margin = 10,464 / 3,500,640 = 0.2989%
ii. Return on assets (ROA)
Return on assets = Operating Profit / Total Assets
Return on assets = (57,082)/ 1,731,955 = (3.29) %
iii. Return on equity (ROE)
Return on equity = Net Income/ Shareholder Equity
Return on equity = (57,082) / 334,579 = (17.06)%
iv. Basic Earning Power (BEP)
Basic Earning Power = EBIT / Total Assets
Basic Earning Power = 10,464 / 1,731,955 = 0.6041%
g. Calculate the following asset management ratios for Computron in 2020:
i. total assets turnover
ii. Days sales outstanding (DSO)
Ans.
i. Total assets turnover
Total assets turnover = Sales / Total assets
Total assets turnover = 3,500,640 / 1,731,955 = 2.02
ii. Day sales outstanding (DSO)
Day sales outstanding (DSO) = Receivables/ (Annual sales/365)
Day sales outstanding (DSO) = 379,296/ (3,500,640/ 365)
Day sales outstanding (DSO) = 379,296/ 9590.79
Day sales outstanding (DSO) = 39.54
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h. Calculate the following liquidity and debt management ratios for Computron in
2020:
i. Current ratio
ii. Quick ratio
iii. Debt-to-assets ratio
iv. Times-interest earned ratio
Ans.
i. Current ratio
Current ratio = Current Assets / Current Liability
Current ratio = 1,168,081 / 797,376 = 1.46
ii. Quick ratio
Quick ratio = (Current Assets – Inventories) / Current Liability
Quick ratio = (1,168,081 – 772,416) / 797,376 = 0.49
iii. Debt ratio
Debt ratio = Total Liabilities / Total Assets
Debt ratio = 1,387,376 / 1,731,955 = 0.80
iv. Times – interest earned ratio
Times – interest earned ratio = EBIT / Interest charges
Times – interest earned ratio = 10,464 / 105,600
Times – interest earned ratio = 0.099
i. Given the following industry ratios for 2020, how do you evaluate the financial
performance of Computron (poor or better) and explain:
i. Operating profit margin 7.20%
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ii. Basic Earning Power 15.60%
iii. ROE 15.40%
iv. Return on Assets 10.80%
v. Total Assets turnover 1.5
vi. Days sales outstanding 28.00
vii. Current ratio 2.50
viii. Quick ratio 1.90
ix. Debt-to-assets ratio 15%
x. Times-interest-earned 13.00
Ans.
Comparing the Computron’s performance with the above given industry average, company’s
performance is poor comparatively. Only the Total asset turnover ratio for computron is
above industry average. Apart from asset turnover ratio, its performance is lagging the
industry standards.
j. 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%.
Ans.
Return on Invested Capital = NOPAT / Operating Capital
Return on Invested Capital = $6,278.40 / $1,354,579
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Return on Invested Capital = 0.46%
Since 0.46% is less than the cost of capital which is 10%, hence the growth did not add
value.
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References
Ehrhardt, M. C., & Brigham, E. F. (2006). Corporate finance: A focused approach. Mason, OH:
Thomson South-Western.
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