managerial finance

 

Problem Set #3

Attached Files:

•  Analysis of Financial Statements.xlsx (19.749 KB)

James Madison was brought in as assistant to Computron’s chairman, who had the task of getting the company back into a sound financial position.  Madison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions to take. Your assignment is to help her answer the following questions, using the recent and projected financial information shown next. Provide clear explanations, not yes or no answers.

1. Why are ratios useful? What three groups use ratio analysis and for what reasons?
2. Calculate the profit margin, operating profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).  What can you say about these ratios?
3. Calculate the 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?
4. Calculate the current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position and its trend?
5. Calculate the debt ratio, liabilities-to-assets ratio, 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?
6. Calculate the price/earnings ratio and market/book ratio.  Do these ratios indicate that investors are expected to have a high or low opinion of the company?
7. Use the extended DuPont equation to provide a summary and overview of Computron’s projected financial condition.  What are the firm’s major strengths and weaknesses?
8. What are some potential problems and limitations of financial ratio analysis?
9. What are some qualitative factors analysts should consider when evaluating a company’s likely future financial performance?

Question 2

shares)

1,000,000 1,000,000

$ 2,034,164 $ 3,285,579 $ 3,739,004

Projection

2018 2019 2020E

)

Projection

2018 2019 2020E

100,000 100,000 100,000

25% 25% 25%

$35,000 $35,000

Projection

2018 2019 2020E

$0.10

8

2018 2019 2020E

%

%

36

1.7

0.5

%

8.9 1.0

1.9

2.2

0.6

																																																																																																																																																										Computron’s Balance Sheets (Millions of Dollars)				Projection
				2018					2019					2020E
Assets
Cash and equivalents	$ 10,000	$ 7,782	$ 15,500
Short-term investments	52,600	25,000	72,632
Accounts receivable	250,600	542,460	85,700
Inventories	837,982	1,546,252	1,779,572
Total current assets	$ 1,151,182	$ 2,121,494	$ 1,953,404
Net Fixed Assets	882,982	1,164,085	1,785,600
Total Assets		$ 2,034,164		$ 3,285,579		$ 3,739,004
Liabilities and equity
Accounts payable	$ 154,600	$ 382,500	$ 452,300
Notes payable	250,000	620,000	450,000
Accruals	142,000	254,700	352,000
Total current liabilities	$ 546,600	$ 1,257,200	$ 1,254,300
Long-term bonds	245,000	800,000	700,000
Total liabilities	$ 791,600	$ 2,057,200	$ 1,954,300
Common stock (			100,000			1,000,000
Retained earnings	242,564	228,379	784,704
Total common equity	$ 1,242,564	$ 1,228,379	$ 1,784,704
Total liabilities and equity
Income Statements (Millions of Dollars)
Net sales	$ 3,532,000	$ 5,648,500	$ 7,453,600
Cost of goods sold (Excluding depr.)	$ 2,547,000	$ 4,687,500	$ 5,750,000
Depreciationa	$ 16,500	$ 187,500	$ 150,000
Other operating expenses	$ 385,000	$ 625,000	$ 723,500
Earnings before interest and taxes (EBIT)	$ 583,500	$ 148,500	$ 830,100
Less interest	$ 65,200	$ 156,000	$ 75,000
Pre-tax earnings	$ 518,300	$ (7,500)	$ 755,100
Taxes (			25%	$ 129,575	$ (1,875)	$ 188,775
Net Income	$ 388,725	$ (5,625)	$ 566,325
Notes:
a Computron has no amortization charges.
Additional Information
Year-end common stock price	$8.50	$7.50	$11.15
Shares outstanding (millions)
Common dividends (millions)	$9,500	$8,560	$10,000
Tax rate
Additions to retained earnings (millions)	$379,225	-$14,185	$556,325
Lease payments (millions)			$35,000
Per Share Information
EPS	$3.89	-$0.06	$5.66
DPS		$0.10	$0.09
Book Value Per Share	$12.43	$1	2.2	$17.85
Ratio Analysis	Industry Average
Profit margin	1	1.0	-0.1%	7.2%
Operating profit margin	16.5%	2.6%	10.4%
Basic earning power	28.7%	4.5%	15.6%
ROA	19.1%	-0.2%	10.8%
ROE	31.3%	–	0.5	15.4%
Inventory turnover	3.1	3.2	9.0
Days sales outstanding	25.9	35.1	28.0
Fixed assets turnover	4.0	4.9	3.0
Total assets turnover		1.7	1.719	1.5
Current	2.1	2.5
Quick		0.6		1.9
Debt ratio	24.3%	43.2%	15.0%
Debt-to-equity ratio	0.40	1.16	0.22
Liabilities-to-assets ratio	3	8.9	62.6%	32.0%
TIE	13.0
EBITDA coverage	6.3	17.2
Price/earnings (P/E)	-133.3	16.8
Market/book	0.7	2.7
*Note “E” denotes “estimated”