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

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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%.
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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 > 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....
View Full Document

Ask a homework question - tutors are online