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A B C D E F G H I
10/28/2015
Input Data:
2015 2016 2017E
Year-end common stock price $8.50 $6.00 $12.17
Year-end shares outstanding 100,000 100,000 250,000
Tax rate 40% 40% 40%
Lease payments $40,000 $40,000 $40,000
Balance Sheets
Assets 2015 2016 2017E
Cash 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 equity
Accounts 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
2015 2016 2017E
Net sales $3,432,000 $5,834,400 $7,035,600
Costs of Goods Sold Except Depr. $2,864,000 $4,980,000 $5,800,000
Depreciation and amortization $18,900 $116,960 $120,000
Other Expenses $340,000 $720,000 $612,960
Total Operating Cost $3,222,900 $5,816,960 $6,532,960
Earnings before interest and taxes (EBIT)
$209,100 $17,440 $502,640
Less interest $62,500 $176,000 $80,000
Pre-tax earnings $146,600 ($158,560) $422,640
Taxes (40%) $58,640 ($63,424) $169,056
Net Income before preferred dividends $87,960 ($95,136) $253,584
EPS $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 current and quick ratios based on the projected balance sheet and income statement data.
Calculated Data: Ratios Industry
2015 2016 2017E Average
Liquidity ratios
Current Ratio 2.33 1.46 2.58 2.70
Quick Ratio 0.85 0.50 0.93 1.00
Industry
Asset Management ratios
2015 2016 2017E Average
Inventory Turnover 4.03 3.96 3.45 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
Industry
Debt Management ratios 2015 2016 2017E Average
EBITDA Coverage Ratio 2.61 0.81 5.52 8.00
Industry
Profitability ratios 2015 2016 2017E Average
Net Profit Margin 2.6% -1.6% 3.6% 3.6%
Operating Margin 6.1% 0.3% 7.1% 7.1%
Gross Profit Margin 16.6% 14.6% 17.6% 15.5%
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%
Industry
Market Value ratios 2015 2016 2017E 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
See the worksheet with the TAB "Common Size and % Change"
DuPont Analysis
ROE =
P.M. X T.A.T.O. X Equity Multiplier
Computron 2015 13.3% 2.6% 2.3 2.21
Computron 2016 -17.1% -1.6% 2.0 5.18
Computron 2017E 12.8% 3.6% 2.0 1.78
Industry Average 18.00% 3.6% 2.5 2.00
d. 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?
e. Calculate the profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can
you say about these ratios?
j. What are some qualitative factors analysts should consider when evaluating a company’s likely future financial
performance? Answer: See Chapter 03 Mini Case Show
a. Why are ratios useful? What three groups use ratio analysis and for what reasons? Answer: See Chapter 03 Mini Case Show
c. 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?
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.
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 yes or no answers.
Chapter 3 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.
f. Calculate the 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 DuPont equation to provide a summary and overview of Computron's projected financial condition.
What are the firm's major strengths and weaknesses?
g. Perform a common size analysis and percent change analysis. What do these analyses tell you about Computron?
i. What are some potential problems and limitations of financial ratio analysis? Answer: See Chapter 03 Mini Case
Common Size Statements
Balance Sheets 2015 2016 2017E Industry
Assets
Cash and equivalents 0.6% 0.3% 0.4% 0.3%
Short-term investments 3.3% 0.7% 2.0% 0.3%
Accounts receivable 23.9% 21.9% 25.0% 22.4%
Inventories 48.7% 44.6% 48.8% 41.2%
Total Current Assets 76.5% 67.4% 76.2% 64.1%
Net Fixed Assets 23.5% 32.6% 23.8% 35.9%
Total Assets 100.0% 100.0% 100.0% 100.0%
Liabilities and equity
Accounts payable 9.9% 11.2% 10.2% 11.9%
Notes payable 13.6% 24.9% 8.5% 2.4%
Accruals 9.3% 9.9% 10.8% 9.5%
Income Statements 2015 2016 2017E Industry
Net sales 100.0% 100.0% 100.0% 100.0%
COGS except depr. 83.4% 85.4% 82.4% 84.5%
Depreciation 0.6% 2.0% 1.7% 4.0%
Other Expenses 9.9% 12.3% 8.7% 4.4%
EBIT 6.1% 0.3% 7.1% 7.1%
Less interest 1.8% 3.0% 1.1% 1.1%
Pre-tax earnings 4.3% -2.7% 6.0% 5.9%
Taxes (40%) 1.7% -1.1% 2.4% 2.4%
Net Income before preferred dividends 2.6% -1.6% 3.6% 3.6%
Common Size Analysis and Percent Change Analysis
In common size analysis, all income statement items are divided by sales, and all balance sheet items are
divided by total assets.
In percent change analysis, all items are expressed as a percent change from the first year, called the base year,
of the analysis.
Percentage Change Analysis
Balance Sheets 2015 2016 2017E
Assets
Cash and equivalents 0% -19.1% 55.6%
Short-term investments 0% -58.8% 47.4%
Accounts receivable 0% 80.0% 150.0%
Inventories 0% 80.0% 140.0%
Total Current Assets 0% 73.2% 138.4%
Net Fixed Assets 0% 172.6% 142.7%
Total Assets 0% 96.5% 139.4%
Liabilities and equity
Accounts payable 0% 122.5% 147.1%
Notes payable 0% 260.0% 50.0%
Accruals 0% 109.5% 179.4%
Total current liabilities 0% 175.9% 115.9%
Long-term bonds 0% 209.2% 54.6%
Total common equity 0% -16.0% 197.9%
Total liabilities and equity 0% 96.5% 139.4%
Income Statements 2015 2016 2017E
Net sales 0% 70.0% 105.0%
Costs of Goods Sold 0% 73.9% 102.5%
Depreciation 0% 518.8% 534.9%
Other Expenses 0% 111.8% 80.3%
EBIT 0% -91.7% 140.4%
Less interest 0% 181.6% 28.0%
Pre-tax earnings 0% -208.2% 188.3%
Taxes (40%) 0% -208.2% 188.3%
Net Income before preferred dividends 0% -208.2% 188.3%
