DUD Computer is a private company. DUD’s major product lines are CAD/CAM computer vision design systems, midrange computers, and computer services.

DUD had $1.26 billion in debt at the end of 2000, its losses were more than half a billion dollars, and its net worth (retained earnings) was a negative $674.9 million. It will be in default on its loan covenants if it fails to secure new financing by the end of 2002. Its summary financial trends were:

2000 1999 Revenue (in billions) $1.44 $1.55 Net (loss) (in millions) ($562.8)* ($172.8)

Loss per share ($ 9.02) ($ 3.21)

*Includes nonrecurring charges of $352.2 million.

Required

a. A business editor claimed that “DUD is in peril with too much debt.” On what basis was this comment made?

b. Construct a scenario with high debt levels where such a comment would be premature.

c. Using the data given above, calculate the net loss and loss per share after excluding the nonrecurring charges.

d. The company’s president and CEO suggested that DUD had a positive cash flow and would have been profitable if it weren’t for huge debt payments and write-downs. Critique the president’s conclusions. Is it possible for a company with such huge losses to have positive cash flows? Why? Is it also possible for a company’s debt payments to affect its net income? Why?