a. The expansion caused sales to go up, but at the same time, it caused net income to decline. For the asset side of the balance sheet, the expansion used some of the cash, reduced short-term investments, increased inventories and accounts receivables, and increased the net(fixed) assets. For liability and equity, the expansion increased accounts receivable, notes payable and accruals as short term funding, and also increased long-term debt as long term funding. No more common stocks were issued on the equity side.
b. Concluding from the statement of cash flows of 2010: for operating activities, there was a net cash outflow because of the expansion; for investing activities, some short-term investments were cashed out to fund the expansion (i.e. acquiring fixed assets), thus there was a net cash outflow; for financing activities, both short- and long-term debts were raised to fund the expansion, subtracting dividends paid, there was a net cash inflow. Moreover, some cash were used to fund the expansion as well.
c. Free cash flow (FCF) is the amount of cash that is available for distribution to all investors, including shareholders and debtholders. There are five good uses for FCF: 1. Pay interest to debtholders, keeping in mind that the net cost of the company is the after-tax interest expense 2. Repay debtholders; that is, pay off some of the debt 3. Pay dividends to shareholders 4. Repurchase stock from shareholders 5. Buy short-term investments or other nonoperating assets
d. Net Operating Profit After Taxes (NOPAT) is the amount of profit Computron would generate if it had no debt and held no financial assets. NOPAT = EBIT x (1-T) (2010) =$17,440 x 60% = $10,464 (2009) =$209,100 x 60% =$125,460
Current assets used in operations are called operating current assets, and the current liabilities that result from operations are called operating current liabilities. Net operating working capital is equal to operating current assets minus operating current liabilities. Net Operating Working Capital (NOWC) NOWC = Operating Current Assets – Operating Current Liabilities (2010) = $1,926,803 – 608,960= $1,317,842 (2009) = $1,075,400 – 281,600 = $793,800
The total operating capital (TOC) is Net Operating Working Capital plus any fixed assets. TOC = NOWC + Fixed Assets (2010) = $1,317,842 + 939,790= $2,257,632 (2009) = $793,800 + 344,800= $1,138,600
e. Computron’s Free Cash Flow (FCF) calculation is the cash flow actually available for distribution to investors after the company has made all necessary investments in fixed assets and working capital to sustain ongoing operations. FCF = NOPAT – Net Investment in Operating Capital (2010) = $10,464 - $1,119,032 = -$1,108,568
Uses of FCF: 2010
After-tax interest payment = $105,600
Reduction(increase) in debt= -$1,196,568
Payment of dividends= $11,000
Repurchase (issue) stock= $0