MINI CASE

ASSIGNMENT: Student should prepare and submit it with (Ballpoint and fountain ink) written form (print, Xerox, typing copy or any image presentation is not acceptable) Source: Eugine.f.Brigham; Financial Practice 11th edition. (10 marks) Management Theory and

Last date: submit latest by 15th December, 2011 The first part of the case, presented in chapter 3, discussed the situation that Computron Industries was in after an expansion program. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2004, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firms survival. Donna Jamison was brought in as assistant to Fred Campo, Computrons chairman, who had the task of getting the company back into a sound financial position. Computrons 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 Jamisons and Campos 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 looked 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 Computrons managers had anticipated. For these reasons, Jamison and Campo see hope for the company--provided 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.

Balance Sheets Assets Cash Short-Term Investments. Accounts Receivable Inventories 2003 $ 9,000 48,600 351,200 715,200 2004 $ 7,282 20,000 632,160 1,287,360 2005e $ 14,000 71,632 878,000 1,716,48 0

Total Current Assets

$ 1,124,000

$ 1,946,802

$ 2,680,112

Gross Fixed Assets Less: Accumulated Depreciation Net Fixed Assets Total Assets Liabilities And Equity Accounts Payable Notes Payable Accruals Total Current Liabilities Long-Term Debt Common Stock (100,000 Shares) Retained Earnings Total Equity Total Liabilities And Equity

491,000 146,200 $ 344,800 $ 1,468,800 2003 $ 145,600 200,000 136,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $ 1,468,800

1,202,950 263,160 $ 939,790 $ 2,886,592 2004 $ 324,000 720,000 284,960 $ 1,328,960 1,000,000 460,000 97,632 $ 557,632 $ 2,886,592

1,220,000 383,160 $ 836,840 $ 3,516,952 2005e $ 359,800 300,000 380,000 $ 1,039,800 500,000 1,680,936 296,216 $ 1,977,152 $ 3,516,952

Income Statements Sales Cost Of Goods Sold Other Expenses Depreciation Total Operating Costs EBIT Interest Expense EBT Taxes (40%) Net Income Other Data Stock Price Shares Outstanding EPS DPS Tax Rate Book Value Per Share Lease Payments 2004 $ $ 5,834,400 3,432,000 2,864,000 4,980,000 340,000 720,000 18,900 116,960 $ $ 5,816,960 3,222,900 $ $ 17,440 209,100 62,500 176,000 $ $ 146,600 (158,560) 58,640 (63,424) $ $ 87,960 (95,136) 2003 2004 $ $ 6.00 8.50 100,000 100,000 $ $ 0.880 (0.951) $ $ 0.110 0.220 40% 40% $ $ 5.576 6.638 $ $ 40,000 40,000 2003 2005e $ 7,035,600 5,800,000 612,960 120,000 $ 6,532,960 $ 502,640 80,000 $ 422,640 169,056 $ 253,584 2005e $ 12.17 250,000 $ 1.014 $ 0.220 40% $ 7.909 $ 40,000

Ratio Analysis Current Quick Inventory Turnover Days Sales Outstanding Fixed Assets Turnover Total Assets Turnover Debt Ratio TIE EBITDA Coverage Profit Margin Basic Earning Power ROA ROE Price/Earnings (P/E) Price/Cash Flow Market/Book

2003 2.3 0.8 4.8 37. 4 10. 0 2. 3 54.8% 3.3 2.6 2.6% 14.2% 6.0% 13.3% 9.7 8.0 1.3

2004 1.5 0.5 4.5 39. 5 6. 2 2. 0 80.7% 0.1 0.8 -1.6% 0.6% -3.3% -17.1% -6.3 27.5 1.1

2005e Industry Average 2.58 2.7 0.93 1.0 4.10 6.1 45.5 32.0 8.4 1 2.0 0 43.8% 6.3 5.5 3.6% 14.3% 7.2% 12.8% 12.0 8.1 1.5 7.0 2.5 50.0% 6.2 8.0 3.6% 17.8% 9.0% 17.9% 16.2 7.6 2.9

a. b.

Why are ratios useful? What are the five major categories of ratios? Calculate the 2005 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companys 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?

c.

Calculate the 2005 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does Computrons utilization of assets stack up against other firms in its industry? 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? Calculate the 2005 profit margin, basic earning power

d.

e.

(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 ratios, and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron? Use the extended Du Pont equation to provide a summary and overview of Computrons financial condition as projected for 2005. What are the firms major strengths and weaknesses? What are some potential problems and limitations of financial ratio analysis?

g.

h.

i.

j.

What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?