What Effect Did The Expansion Have On Sales And Net Income? ✓ Solved

What effect did the expansion have on sales and net income?

Cochran was assigned to evaluate the impact of the changes at Computron Industries following the company's recent expansion efforts, which included doubling plant capacity, opening new sales offices, and launching an expensive advertising campaign. This evaluation focuses on several areas:

The first aspect to consider is the effect of the expansion on sales and net income. The decision to increase plant capacity and expand sales offices typically aims to increase market reach and production capabilities, potentially leading to increased sales volumes. Historical financial data should be analyzed to compare sales figures before and after the expansion. This will help determine whether there has been a significant increase in revenue attributable to these changes.

Net income will also be examined in relation to sales changes. Increased sales do not automatically translate to increased net income, as costs associated with the expansion (like advertising and operational costs) could offset additional revenue. A thorough analysis of the income statement will provide insights into these dynamics.

Asset Side of the Balance Sheet

Next, we must assess the asset side of the balance sheet. Expanding operations often means increasing current and fixed assets. For Computron, an increase in inventory levels, receivables, and capital expenditures should be investigated to see how these changes impact overall asset management and liquidity ratios.

Cochran should evaluate key financial ratios that illustrate the balance between current assets and liabilities, focusing on the operational efficiency of these assets. These insights will reflect how effectively Computron has utilized its assets to generate revenues.

Statement of Cash Flows Analysis

The statement of cash flows serves as a critical tool for assessing the financial health of Computron. By analyzing cash flows from operating, investing, and financing activities, Cochran will gain a clearer picture of how the expansion influenced cash generation and utilization. Positive cash flow from operations would indicate that the expansion is contributing positively to revenue generation after accounting for operating expenses.

Cochran should identify any significant changes in cash flows attributed to the recent investments and broader operational changes at Computron.

Net Operating Profit After Taxes (NOPAT)

Calculating Computron’s net operating profit after taxes (NOPAT) is another essential component of the assessment. NOPAT represents the company's profitability from operations after tax expenses, excluding non-operational income and expenses, and is calculated by adjusting operating income for taxes. Cochran will also assess operating current assets and current liabilities to construct a clearer assessment of operational efficiency.

Net Operating Working Capital and Total Net Operating Capital

Operating current assets and liabilities need to be calculated to derive net operating working capital (NOWC) and total net operating capital (TNOC). NOWC can be derived by subtracting current liabilities from current assets, providing insight into the liquidity and operational capacity of Computron. On the other hand, TNOC comprises all operational assets minus operational liabilities, crucial for assessing the financial investment in operations against the company's current financial obligations.

Free Cash Flow (FCF) Analysis

Another pivotal element in this evaluation will be the calculation of Computron’s free cash flow (FCF), which indicates the cash generated by operations after accounting for capital expenditures. FCF can be important for funding growth investments, paying dividends, or reducing debt. Cochran needs to evaluate what Computron’s net uses of its FCF are, including investments, dividends, or other expenditures. This analysis informs stakeholders whether Computron is efficiently using its cash resources to drive further growth.

Return on Invested Capital (ROIC)

Calculating Computron’s return on invested capital (ROIC) will further reveal the efficiency of capital usage in generating profits. ROIC can be compared against the firm’s weighted average cost of capital (WACC), set at 10%, to assess how effectively Computron is creating wealth for its investors. An important aspect of this analysis will be to determine whether a decline in ROIC is due to operating profitability or capital utilization challenges.

Value Added by Growth

Cochran should critically assess whether Computron’s growth added value, considering both ROIC and economic value added (EVA). EVA quantifies how much value is created beyond the cost of capital, being an essential measure of financial performance. If EVA is positive, it indicates that Computron is generating value for shareholders and managing capital effectively.

Tax Liability and Investment Choices

In a broader context, Cochran will evaluate tax liabilities based on Computron's taxable income. For $200,000 of taxable income, the federal tax liability at a 25% marginal tax rate would be calculated, providing insights into the tax burden and financial planning necessary for the firm.

Finally, evaluating personal investment decisions will guide individuals determining investment strategies between municipal bonds and corporate bonds, including the marginal tax rate at which one would be indifferent between these options. This will encapsulate how tax implications affect investment decision-making.

Conclusion

In summary, the expansion of Computron Industries presents a significant opportunity for growth and profitability evaluation. Through detailed analysis of sales impact, net income, the balance sheet assets, cash flow statements, and key financial metrics like NOPAT, free cash flow, ROIC, and EVA, Cochran can definitively quantify the expansion's effectiveness. Insight derived from the computations and analyses will guide management in making strategic decisions that align with the organization’s long-term goals and operational efficiencies.

References

• Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance. McGraw-Hill Education.
• Damodaran, A. (2010). Applied Corporate Finance. Wiley.
• Koller, T., Goedhart, M., & Wessels, D. (2015). Valuation: Measuring and Managing the Value of Companies. Wiley.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate Finance. McGraw-Hill Education.
• Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance, and the Theory of Investment. American Economic Review.
• Penman, S. H. (2012). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.
• White, G. I., Sondhi, A. J., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.
• Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
• Stern, J. M., Stewart, G. B. (2016). The EVA Challenge: Implementing Value-Added Change in an Organization. Wiley.
• McKinsey & Company Inc. (2005). Valuation: Measuring and Managing the Value of Companies. McKinsey & Company.