Chapter 13 Mini Case
Input Data:2003 2004 2005
Year-end common stock price $8.50 $6.00 $12.17 Year-end shares
outstanding 100,000 100,000 250,000Tax rate 40% 40% 40%Lease
payments $40,000 $40,000 $40,000
Balance Sheets
Assets 2003 2004 2005Cash and equivalents $9,000 $7,282 $14,000
Short-term investments $48,600 $20,000 $71,632 Accounts receivable
$351,200 $632,160 $878,000 Inventories $715,200 $1,287,360
$1,716,480 Total current assets $1,124,000 $1,946,802 $2,680,112
Gross Fixed Assets $491,000 $1,202,950 $1,220,000 Less Accumulated
Dep. $146,200 $263,160 $383,160 Net Fixed Assets $344,800 $939,790
$836,840 Total Assets $1,468,800 $2,886,592 $3,516,952
Liabilities and equityAccounts payable $145,600 $324,000
$359,800 Notes payable $200,000 $720,000 $300,000 Accruals $136,000
$284,960 $380,000 Total current liabilities $481,600 $1,328,960
$1,039,800 Long-term bonds $323,432 $1,000,000 $500,000 Total
liabilities $805,032 $2,328,960 $1,539,800 Common stock (100,000
shares) $460,000 $460,000 $1,680,936 Retained earnings $203,768
$97,632 $296,216 Total common equity $663,768 $557,632 $1,977,152
Total liabilities and equity $1,468,800 $2,886,592 $3,516,952
Income Statements
2003 2004 2005Net sales $3,432,000 $5,834,400 $7,035,600Costs of
Goods Sold $2,864,000 $4,980,000 $5,800,000Other Expenses $340,000
$720,000 $612,960Depreciation $18,900 $116,960 $120,000Total
Operating Cost $3,222,900 $5,816,960 $6,532,960Earnings before
interest and taxes (EBIT) $209,100 $17,440 $502,640Less interest
$62,500 $176,000 $80,000Earnings before taxes (EBT) $146,600
-$158,560 $422,640Taxes (40%) $58,640 -$63,424 $169,056Net Income
before preferred dividends $87,960 -$95,136 $253,584EPS $0.880
($0.951) $1.014 DPS $0.220 $0.110 $0.220 Book Value Per Share
$6.638 $5.576 $7.909
b. (1.) Calculate the 2005 current and quick ratios based on the
projected balance sheet and income statement data.
Calculated Data: Ratios Industry2003 2004 2005 Average
Liquidity ratios Current Ratio 2.33 1.46 2.58 2.70 Quick Ratio
0.85 0.50 0.93 1.00
IndustryAsset Management ratios 2003 2004 2005 Average Inventory
Turnover 4.80 4.53 4.10 6.10 Days Sales Outstanding 37.4 39.5 45.5
32.00 Fixed Asset Turnover 9.95 6.21 8.41 7.00 Total Asset Turnover
2.34 2.02 2.00 2.50
IndustryDebt Management ratios 2003 2004 2005 Average Debt Ratio
54.8% 80.7% 43.8% 50.0% Times Interest Earned 3.35 0.10 6.28 6.20
EBITDA Coverage Ratio 2.61 0.81 5.52 8.00
IndustryProfitability ratios 2003 2004 2005 Average Profit
Margin 2.6% -1.6% 3.6% 3.6% Basic Earning Power 14.2% 0.6% 14.3%
17.8% Return on Assets 6.0% -3.3% 7.2% 9.0% Return on Equity 13.3%
-17.1% 12.8% 18.0%
IndustryMarket Value ratios 2003 2004 2005 Average Price-to
Earnings Ratio 9.66 -6.31 12.00 14.20 Price-to-Cash Flow Ratio 7.95
27.49 8.14 7.60 Market-to-Book Ratio 1.28 1.08 1.54 2.90 Book Value
Per Share 6.64 5.58 7.91 na
g. Perform a common size analysis and percent change analysis.
What do these analyses tell you about Computron?
See the worksheet with the TAB "Common Size and % Change"
Du Pont Analysis ROE P.M. T.A.T.O.Equity MultiplierComputron
2003 13.3% 2.6% 2.3 2.21Computron 2004 -17.1% -1.6% 2.0
5.18Computron 2005 12.8% 3.6% 2.0 1.78
Industry Average 18.00% 3.6% 2.5 2.00
The first part of the case, presented in Chapter 3, discussed
the situation that Computron Industries was in after and expansion
program. Thus far, sales have not been up to the forecasted level,
cost have been higher than were projected, and a large loss
occurred in 2004, rather than the expected profit. As a result, its
managagers, directors, and investors are concerned about the firm's
survival.
Donna Jamison was brought in as an assistant to Fred Campo,
Computron's chairman, who had the task of getting the company back
into a sound financial position. Computron's 2003 and 2004 balance
sheets and income statements, together with projections for 2005,
are shown in the following tables. Also, the tables show the 2003
and 2004 financial ratios along with industry average data. The
2005 projected financial statement data represent Jamison's and
Campo's best guess for 2005 results, assuming that some new
financing is arranged to get the company "over the hump."
Jamison examined monthly data for 2004 (not given in the case),
and she detected an improving pattern during the year. Monthly
sales were rising, costs were falling, and large losses in the
early months had turned to a small profit by December. Thus, the
annual data look somewhat worse than final monthly data. Also, it
appears to be taking longer for the advertising program to get the
message across, for the new sales offices to generate sales, and
for the new manufacturing facilities to operate efficiently. In
other words, the lags between spending money and deriving benefits
were longer than Computron's managers had anticipated. For these
reasons, Jamison and Campo see hope for the companyprovided it can
survive in the short run.
Jamison must prepare an analysis of where the company is now,
what it must do to regain its financial health, and what actions
should be taken. Your assignment is to help her answer the
following questions. Provide clear explanations, not yes or no
answers.
a. Why are ratios useful? What are the five major categories of
ratios? Answer: See Chapter 13 Mini Case Show
(2.) What can you say about the company's liquidity position in
2003, 2004, and as projected for 2005? We often think of ratios as
being useful (1) to managers to help run the business, (2) to
bankers for credit analysis, and (3) to stockholders for stock
valuation. Would these different types of analysts have an equal
interest in the liquidity ratios? Answer: See Chapter 13 Mini Case
Show
c. Calculate the 2005 inventory turnover, days sales outstanding
(DSO), fixed assets turnover, operating capital requirement, and
total assets turnover. How does Computron's utilization of assets
stack up against other firms in its industry?
d. Calculate the 2005 debt, times-interest-earned, and EBITDA
coverage ratios. How does Computron compare with the industry with
respect to financial leverage? What can you conclude from these
ratios?
e. Calculate the 2005 profit margin, basic earning power (BEP),
return on assets (ROA), and return on equity (ROE). What can you
say about these ratios?
f. Calculate the 2005 price/earnings ratio, price/cash flow
ratio, and market/book ratio. Do these ratios indicate that
investors are expected to have a high or low opinion of the
company?
h. Use the extended Du Pont equation to provide a summary and
overview of Computron's financial condition as projected for 2005.
What are the firm's major strengths and weaknesses?
i. What are some potential problems and limitations of financial
ratio analysis? Answer: See Chapter 13 Mini Case Show
j. What are some qualitative factors analysts should consider
when evaluating a companys likely future financial performance?
Answer: See Chapter 13 Mini Case Show
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