A B C D E F

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3 Chapter 3 Mini Case
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5 The first part of the case, presented in Chapter 3, discussed the situation of Computron Industries after an expansion
6 program. A large loss occurred in 2013, rather than the expected profit. As a result, its managers, directors, and investors
7 are concerned about the firm’s survival.
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10 Jenny Cochran was brought in as assistant to Gary Meissner, Computron’s chairman, who had the task of getting the
11 company back into a sound financial position. Computron’s 2012 and 2013 balance sheets and income statements,
together with projections for 2014, are shown in the following tables. The tables also show the 2012 and 2013 financial
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ratios, along with industry average data. The 2014 projected financial statement data represent Cochran’s and Meissner’s
13 best guess for 2014 results, assuming that some new financing is arranged to get the company “over the hump.”
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15 Input Data:
16 2012 2013 2014
17 Year-end common stock price $8.50 $6.00 $12.17
18 Year-end shares outstanding 100,000 100,000 250,000
19 Tax rate 40% 40% 40%
20 Lease payments $40,000 $40,000 $40,000
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22 Balance Sheets
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25 Assets 2012 2013 2014
26 Cash and equivalents $9,000 $7,282 $14,000
27 Short-term investments $48,600 $20,000 $71,632
28 Accounts receivable $351,200 $632,160 $878,000
29 Inventories $715,200 $1,287,360 $1,716,480
30 Total current assets $1,124,000 $1,946,802 $2,680,112
31 Gross Fixed Assets $491,000 $1,202,950 $1,220,000
32 Less Accumulated Dep. $146,200 $263,160 $383,160
33 Net Fixed Assets $344,800 $939,790 $836,840
34 Total Assets $1,468,800 $2,886,592 $3,516,952
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36 Liabilities and equity
37 Accounts payable $145,600 $324,000 $359,800
38 Notes payable $200,000 $720,000 $300,000
39 Accruals $136,000 $284,960 $380,000
40 Total current liabilities $481,600 $1,328,960 $1,039,800
41 Long-term bonds $323,432 $1,000,000 $500,000
42 Total liabilities $805,032 $2,328,960 $1,539,800
43 Common stock (100,000 shares) $460,000 $460,000 $1,680,936
44 Retained earnings $203,768 $97,632 $296,216
45 Total common equity $663,768 $557,632 $1,977,152
46 Total liabilities and equity $1,468,800 $2,886,592 $3,516,952
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48 Income Statements
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50 2012 2013 2014
51 Net sales $3,432,000 $5,834,400 $7,035,600
52 Costs of Goods Sold Except Depr. $2,864,000 $4,980,000 $5,800,000
53 Depreciation and amortization $18,900 $116,960 $120,000
54 Other Expenses $340,000 $720,000 $612,960
55 Total Operating Cost $3,222,900 $5,816,960 $6,532,960
56 Earnings before interest and taxes (EBIT) $209,100 $17,440 $502,640
57 Less interest $62,500 $176,000 $80,000
58 Pre-tax earnings $146,600 ($158,560) $422,640
59 Taxes (40%) $58,640 ($63,424) $169,056
60 Net Income before preferred dividends $87,960 ($95,136) $253,584
61 EPS $0.880 ($0.951) $1.014
62 DPS $0.220 $0.110 $0.220
63 Book Value Per Share $6.638 $5.576 $7.909
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66 Cochran 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
67 yes or no answers.
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69 b. (1.) Calculate the current and quick ratios based on the projected balance sheet and income statement data.
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71 Calculated Data: Ratios Industry
72 2012 2013 2014 Average
73 Liquidity ratios
74 Current Ratio 2.33 1.46 2.70
75 Quick Ratio 0.85 0.50 1.00
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77
78 (2.) What can you say about the company's liquidity position? 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
79 different types of analysts have an equal interest in the liquidity ratios?

80

81

82 c. (1) Calculate the inventory turnover, days sales outstanding (DSO), fixed assets turnover, operating capital requirement,
83 and total assets turnover.
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85 Industry
86 Asset Management ratios 2012 2013 2014 Average
87 Inventory Turnover 4.03 3.96 6.10
88 Days Sales Outstanding 37.4 39.5 32.00
89 Fixed Asset Turnover 9.95 6.21 7.00
90 Total Asset Turnover 2.34 2.02 2.50
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(2) How does Computron's utilization of assets stack up against other firms in its industry?

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94 d. (1) Calculate the debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios.
95 Industry
96 Debt Management ratios 2012 2013 2014 Average
97 Debt Ratio 35.6% 59.6% 32.0%
98 Liabilities-to-assets Ratio 54.8% 80.7% 50.0%
99 Times Interest Earned 3.35 0.10 6.20
100 EBITDA Coverage Ratio 2.61 0.81 8.00

101 (2) How does Computron compare with the industry with respect to financial leverage? What can you conclude from these
ratios?

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103
104 e. (1) Calculate the profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).
105 Industry
106 Profitability ratios 2012 2013 2014 Average
107 Profit Margin 2.6% -1.6% 3.6%
108 Basic Earning Power 14.2% 0.6% 17.8%
109 Return on Assets 6.0% -3.3% 9.0%
110 Return on Equity 13.3% -17.1% 18.0%

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(2) What can you say about these ratios?

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114 f. (1) Calculate the price/earnings ratio, price/cash flow ratio, and market/book ratio.
115 Industry
116 Market Value ratios 2012 2013 2014 Average
117 Price-to Earnings Ratio 9.66 -6.31 14.20
118 Price-to-Cash Flow Ratio 7.95 27.49 7.60
119 Market-to-Book Ratio 1.28 1.08 2.90
120 Book Value Per Share 6.64 5.58 na

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(2) Do these ratios indicate that investors are expected to have a high or low opinion of the company?

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123 h. (1)Use the extended DuPont equation to provide a summary and overview of Computron's projected financial condition.
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126 DuPont Analysis ROE = P.M. T.A.T.O. Equity Multiplier
127 Computron 2012 13.3% 2.6% 2.3 2.21
128 Computron 2013 -17.1% -1.6% 2.0 5.18
129 Computron 2014
130 Industry Average 18.00% 0.0% 2.5 2.00
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132 (2) What are the firm's major strengths and weaknesses?
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