978-1305632295 Chapter 3 Solution Manual Part 2

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SOLUTION TO SPREADSHEET PROBLEM

3-15 The detailed solution for the problem is available is in the file Ch03 P15 Build a Model

Solution.xlsx and is available at the textbook’s web site.

Answers and Solutions: 3 – 1

website, in whole or in part.

MINI CASE

The first part of the case, presented in Chapter 2, discussed the situation of Computron

Industries after an expansion program. A large loss occurred in 2016, rather than the

expected profit. As a result, its managers, directors, and investors are concerned about the

firm’s survival.

Jenny Cochran was brought in as assistant to Computron’s chairman, who had the task of

getting the company back into a sound financial position. Cochran 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.

Answers and Solutions: 3 – 2

website, in whole or in part.

Balance Sheets

Assets 2015 2016 2017E

Cash $ 9,000 $ 7,282 $ 14,000

Short-Term Investments. 48,600 20,000 71,632

Accounts Receivable 351,200 632,160 878,000

1,468,800

Liabilities And Equity 2013 2014 2015e

Accounts Payable $

145,600

$ 324,000 $ 359,800

Notes Payable 200,000 720,000 300,000

Accruals 136,000 284,960 380,000

Answers and Solutions: 3 – 3

website, in whole or in part.

Income Statements

2015 2016 2017E

Sales $ 3,432,000 $ 5,834,400 $ 7,035,600

COGS except depr. 2,864,000 4,980,000 5,800,000

Depreciation 18,900 116,960 120,000

Other Data 2015 2016 2017E

Stock Price $ 8.50 $ 6.00 $ 12.17

Shares Outstanding 100,000 100,000 250,000

Ratio Analysis 2015 2016 2017E Industry Average

Current 2.3 1.5 2.58 2.7

Quick 0.8 0.5 0.93 1.0

Debt Ratio 35.6% 59.6% 22.7% 32.0%

Liabilities/Assets Ratio 54.8% 80.7% 43.8% 50.0%

TIE 3.3 0.1 6.3 6.2

Answers and Solutions: 3 – 4

website, in whole or in part.

a. Why are ratios useful? What three groups use ratio analysis and for what

reasons?

Answer: Ratios facilitate comparison of (1) one company over time and (2) one company

b. Calculate the 2017 current and quick ratios based on the projected balance sheet

and income statement data. What can you say about the company’s liquidity

position in 2015, 2016, and as projected for 2017? 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: Current Ratio17 = Current Assets/Current Liabilities

Quick Ratio17 = (Current Assets – Inventory)/Current Liabilities

The company’s current and quick ratios are higher relative to its 2015 current and

Answers and Solutions: 3 – 5

website, in whole or in part.

c. Calculate the 2017 inventory turnover, days sales outstanding (DSO), fixed assets

turnover, and total assets turnover. How does Computron’s utilization of assets

stack up against other firms in its industry?

Answer: Inventory Turnover16 = COGS/Inventory

DSO17= Receivables/(Sales/365)

Fixed Assets Turnover17 = Sales/Net Fixed Assets

Total Assets Turnover17 = Sales/Total Assets

The firm’s inventory turnover ratio has declined, while its days sales outstanding

The firm’s inventory turnover and total assets turnover are below the industry

average. The firm’s days sales outstanding is above the industry average (which is

Answers and Solutions: 3 – 6

website, in whole or in part.

d. Calculate the 2017 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?

Answer: Debt Ratio17 = Total Debt/Total Assets

Liabilities-to-Assets Ratio16 = Total Liabilities/Total Assets

EBITDA Coverage17 =



Payments

Lease

EBITDA





Payments

Lease

Repayments

Loan

Interest

The firm’s debt ratio is much improved from 2016, and is still lower than its 2015

e. Calculate the 2017 profit margin, basic earning power (BEP), return on assets

(ROA), and return on equity (ROE). What can you say about these ratios?

Basic Earning Power17 = EBIT/Total Assets = $502,640/$3,516,952

The firm’s profit margin is above 2015 and 2016 levels and is at the industry

Answers and Solutions: 3 – 7

website, in whole or in part.