# fm3 16 - Investors did not get the return they require Note...

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Mini Case: 3 - 16 e. What are Computron’s net operating profit after taxes (NOPAT) and free cash flow (FCF)? ANSWER: NOPAT = EBIT(1 - TAX RATE) NOPAT 07 = \$17,440(1 - 0.4) = \$10,464. NOPAT 06 = \$125,460. FCF = NOPAT - NET INVESTMENT IN CAPITAL = \$10,464 - (\$2,257,632 - \$1,138,600) = \$10,464 - \$1,119,032 = -\$1,108,568. f. Calculate Computron’s return on invested capital. Computron has a 10% cost of capital (WACC). Do you think Computron’s growth added value? ANSWER: ROIC = NOPAT / TOTAL NET OPERATING CAPITAL . ROIC 07 = \$10,464 / \$2,257,632 = 0.5%. ROIC 06 = 11.0%. The ROIC of 0.5% is less than the WACC of 10%.
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Unformatted text preview: Investors did not get the return they require. Note: high growth usually causes negative FCF (due to investment in capital), but thats OK if ROIC &amp;gt; WACC. For example, home depot has high growth, negative FCF, but a high ROIC. g. Jamison also has asked you to estimate Computron's EVA. She estimates that the after-tax cost of capital was 10 percent in both years. ANSWER: EVA = NOPAT- (WACC)(CAPITAL). EVA 07 = \$10,464 - (0.1)(\$2,257,632) = \$10,464 - \$225,763 = -\$215,299. EVA 06 = \$125,460 - (0.10)(\$1,138,600) = \$125,460 - \$113,860 = \$11,600....
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