Financial Management

Chapter 3 Case

CompU has been in business for 3 years now, and things are going well. Bill Jobs has been able to expand the company onto two other campuses, and the companys sales and earnings have increased quickly. Since Bills background is not in finance, after interviewing many candidates he recently decided to hire Warren Lynch as CompUs first chief financial officer. Warren has a background in accounting and has quite a bit of experience in budgetary procedures. Warrens first task is to undertake a complete analysis of the firms financial condition, including strengths and weaknesses, in order to develop sound financial plans for additional future expansion.

Using the financial statements and industry standard ratios below, develop a complete time series and cross-sectional analysis of CompUs financial condition including strengths and weaknesses of CompU.

Prepare common size balance sheets and income statements for 2011 and 2012 and address changes and concerns.

Warren also believes the DuPont method of analysis is also a good way to see how the company is generating returns to its owner. Prepare a DuPont analysis for both CompU and the industry and discuss CompUs performance as compared to its industry.

After analyzing the data, what conclusions and recommendations would Warren be justified in making his report to Bill? What areas of CompUs operations are in greatest need of immediate attention? Prepare a planned course of action for the solution of the firms most pressing problems.

Standard Industry Ratios

Current ratio 3.50

Quick ratio 1.50

Average Collection period 30 days

Inventory turnover 5.00

Total asset turnover 1.00

Debt ratio 45.0%

Times interest earned 4.10

Gross profit margin 25.0%

Net profit margin 8.0%

Return on total assets 8.0%

Return on equity 14.50%

Financial Leverage Multiplier 1.81

CompU, Inc.

Comparative Balance Sheets

December 31, 2011 December 31, 2012

Assets

Cash $ 50,000 $ 10,000

Accounts Receivable 100,000 120,000

Inventory 150,000 150,000

Total Current Assets $ 300,000 $ 280,000

Fixed Assets 1,200,000 1,480,000

Less: Accumulated Depreciation (500,000) (560,000)

Total Fixed Assets $ 700,000 $ 920,000

Total Assets $1,000,000 $1,200,000

Liabilities and Stockholders Equity

Accounts Payable $ 40,000 $ 42,000

Accruals 20,000 24,000

Notes Payable 50,000 224,000

Total Current Liabilities $ 110,000 $ 290,000

Long-term debt 200,000 200,000

Common Stock 200,000 200,000

Retained Earnings 490,000 510,000

Total Liabilities and Stockholders Equity $1,000,000 $1,200,000

CompU, Inc.

Income Sheets

December 31, 2011 December 31, 2012

Sales $1,000,000 $1,200,000

Cost of Goods Sold 675,000 900,000

Gross Profit 325,000 300,000

Operating Expenses:

S, G, & A 100,000 114,000

Depreciation 50,000 60,000

Total Operating Expenses 150,000 174,000

Operating Profit 175,000 126,000

Interest Expense 25,000 39,000

Net income before taxes 150,000 87,000

Taxes 60,000 34,800

Net income after taxes 90,000 52,200