Answers and Solutions: 3 – 11
website, in whole or in part.
750,752,1$
For the industry, ROE = 1.2% 3 2.5 = 9%.
Note: To find the industry ratio of assets to common equity, recognize that 1 minus
the Liabilities-to-assets ratio = common equity/total assets. So, common equity/total
assets = 1 – 60% = 40%, and 1/0.40 = 2.5 = total assets/common equity.
c. The firm’s days sales outstanding is more than twice as long as the industry average,
leverage is similar to others in the industry.
Answers and Solutions: 3 – 12
website, in whole or in part.
3-14 Here are the firm’s base case ratios and other data as compared to the industry:
Quick $511,000/$602,000 = 0.8 1.0 Weak
Current $1,405,000/$602,000 = 2.3 2.7 Weak
Inventory turnover $3,580,000/$894,000 = 4.0 7.0 Poor
Days sales outstanding $439,000/$11,753 = 37 days 32 days Poor
Fixed assets turnover $4,290,000/$431,000 = 10.0 13.0 Poor
EPS $4.71 n.a. —
Stock Price $23.57 n.a. —
P/E ratio $23.57/$4.71 = 5.0 6.0 Poor
P/CF ratio $23.57/$11.63 = 2.0 3.5 Poor
M/B ratio $23.57/$36.07 = 0.65 n.a. —
website, in whole or in part.
SOLUTION TO SPREADSHEET PROBLEM
Mini Case: 3 – 14
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.
Balance Sheets
Assets
2015
2017E
Cash
$ 9,000
$ 14,000
Short-Term Investments.
48,600
20,000
71,632
Accounts Receivable
351,200
878,000
Inventories
715,200
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 Depreciation
146,200
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
2013
2014
2015e
Accounts Payable
$ 145,600
$ 359,800
Notes Payable
200,000
720,000
300,000
Accruals
136,000
284,960
380,000
Total Current Liabilities
$ 481,600
$ 1,039,800
Long-Term Debt
323,432
1,000,000
500,000
Common Stock (100,000 Shares)
460,000
460,000
1,680,936
Retained Earnings
203,768
97,632
296,216
Total Equity
$ 663,768
$ 557,632
$ 1,977,152
Total Liabilities And Equity
$ 1,468,800
$ 2,886,592
$ 3,516,952
Mini Case: 3 – 15
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 Expenses
340,000
720,000
612,960
Total Operating Costs
$ 3,222,900
$ 5,816,960
$ 6,532,960
EBIT
$ 209,100
$ 17,440
$ 502,640
Interest Expense
62,500
176,000
80,000
EBT
$ 146,600
$ (158,560)
$ 422,640
Taxes (40%)
58,640
(63,424)
169,056
Net Income
$ 87,960
$ (95,136)
$ 253,584
Other Data
2015
2016
2017E
Stock Price
$ 8.50
$ 6.00
$ 12.17
Shares Outstanding
100,000
100,000
250,000
EPS
$ 0.880
$ (0.951)
$ 1.014
DPS
$ 0.220
$ 0.110
$ 0.220
Tax Rate
40%
40%
40%
Book Value Per Share
$ 6.638
$ 5.576
$ 7.909
Lease Payments
$ 40,000
$ 40,000
$ 40,000
Ratio Analysis
2015
2017E
Industry Average
Current
2.3
2.58
2.7
Quick
0.8
0.5
0.93
1.0
Inventory Turnover
4.0
3.45
6.1
Days Sales Outstanding
37.4
39.5
45.5
32.0
Fixed Assets Turnover
10.0
6.2
8.41
7.0
Total Assets Turnover
2.3
2.0
2.00
2.5
Debt Ratio
35.6%
59.6%
22.7%
32.0%
Liabilities/Assets Ratio
54.8%
80.7%
43.8%
50.0%
TIE
3.3
6.3
6.2
EBITDA Coverage
2.6
0.8
5.5
8.0
Profit Margin
2.6%
-1.6%
3.6%
3.6%
Basic Earning Power
14.2%
0.6%
14.3%
17.8%
ROA
6.0%
7.2%
9.0%
ROE
13.3%
-17.1%
12.8%
17.9%
Price/Earnings (P/E)
9.7
-6.3
12.0
16.2
Price/Cash Flow
8.0
27.5
8.1
7.6
Market/Book
1.3
1.1
1.5
2.9
Mini Case: 3 – 16
website, in whole or in part.
a. Why are ratios useful? What three groups use ratio analysis and for what
reasons?
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
The company’s current and quick ratios are higher relative to its 2015 current and
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?
= $7,035,600/$836,840 = 8.41.
Total Assets Turnover17 = Sales/Total Assets
= $7,035,600/$3,516,952 = 2.0.
The firm’s inventory turnover ratio has declined, while its days sales outstanding
might be due to the fact that Computron is an older firm than most other firms in the
industry, in which case, its fixed assets are older and thus have been depreciated
more, or that Computron’s cost of fixed assets were lower than most firms in the
industry.)