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Global Financial Management - Assignment Example

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The assignment"Global Financial Management" states that the expansion caused the sales to increase while the net income fell. The asset increased by about double the amount. The funds provided by suppliers increased. The Debt increased, but the year’s retained earnings fell due to reported loss…
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Global Financial Management
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What is free cash flow? Why is it important? What are the five uses of FCF?
Free cash flow is the amount of cash that is available to the investors after all investments in fixed capital and working capital necessary to support the operations of a company have been made. It is important to a company because it adds value to it. This is because it can be used by the company to do anything they wish.
It is used in paying dividends, interest on the debt and back principal on debt. In addition, it is used to buy back stock and non-operating stock.
d. What is Compton’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have?
NOPAT = EBIT (1- Tax Rate)
= 17440(1-0.4)
=$10464
Operating currents assets are those currents assets that a company uses to support its operations. On the other hand, operating current liabilities are the current liabilities that a company incurs due to normal operations.
Net Operating Working Capital = Operating Current Assets – Operating Current Liabilities
= 1926802 – 608960
=$ 1317842
Total Operating Working Capital = Net Operating Working Capital + Net Fixed Assets
= 1317842 + 939790
= $2257632
e. What is Computron’s FCF? What are Computron’s “net uses” of its FCF?
FCF = NOPAT – Net investment in operating Capital
= 10464 – (2257632 – 1138600)
=1108568
The net uses of the Computrons’s FCF is paying dividends.
f. Calculate Computron’s return on investment. Computers have a 10% cost of capital (WACC). DO you think Computron’s growth added value?
Return on Investment = 10464/2257632
= 0.5 %
The Return on Investment of 0.5 % is less than the cost of capital of 10%. Computron’s growth did not create the value it deserves. Since the ROI should be greater than the cost of capital.
g. Cochran also has asked you to estimate Computron’s EVA. She estimates that the after-tax cost of capital was 10% in both years.
EVA = NOPAT – (WACC)(Capital)
= 10464 – (0.1)(2257632)
= $ 215299.20
EVA =125460 – (0.1)(1138600)
= $ 11600
h. What happened to Computron’s Market Value Added (MVA)?
The market value-added declined.
i. Assume that a corporation has $100000 of taxable income from operations plus $5000 of interest income and $10000 of dividend income. What is the company's federal tax liability?
Taxable income = 100000+5000+10000(0.3) =108000
Tax = 22250 + 0.39(108000-100000)
= 25370

j. Assume that you are in the 25% marginal tax bracket and that you have $5000 to invest. You have narrowed your investment choices down to California bonds with a yield of 7% or equally risky ExxonMobil bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent to the choice between California and ExxonMobil bonds?
After-tax return income at t = 27%:
Exxon = 0.10($5,000) - (0.10) ($5,000)(0.27) = $365.
California = 0.07($5,000) - $0 = $350.
I would choose Exxon.
At what marginal tax rate would you be indifferent?
7.0% = 10.0% (1 - t). Solve for t.
7.0% = 10.0% - 10.0% (t)
10.0 % (t) = 3%
t = 30%. Read More
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