The first part of the case, presented in Chapter 2, discussed the situation of Computron In- dustries after an expansion program. A large loss occurred in 2010, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival. Donna Jamison was brought in as assistant to Fred Campo, Computron's chairman, who had the task of getting the company back into a sound financial position. Computron's 2009 and 2010 balance sheets and income statements, together with projections for 2011, are shown in the following tables. The tables also show the 2009 and 2010 financial ratios, along with in- dustry average data. The 2011 projected financial statement data represent Jamison's and Campo's best guess for 2011 results, assuming that some new financing is arranged to get the company "over the hump." Balance Sheets 2009 2010 2011E Assets Cash Short-term investments Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets S 9,000 48,600 351,200 715,200 S1,124,000 491,000 146,200 S 344,800 $1,468,800 S 7,282 20,000 632,160 1,287,360 S1,946,802 1,202,950 263,160 S 939.790 $2.886,592 S 14,000 71,632 878,000 1.716,480 S2,680,112 1,220,000 383,160 S 836,840 S3,516,952 Liabilities and Equity Accounts payable S 145,600 $ 324,000 Notes payable 200,000 720,000 Accruals 136,000 284,960 Total current liabilities S481,600 51,328,960 Long-term debt 323,432 1,000,000 Common stock (100,000 shares) 460,000 460,000 Retained earnings 203.768 97.632 Total equity S 663,768 S 557,632 Total liabilities and equity S1,468,800 S2.886,592 Note: "E" denotes "estimated"; the 2011 data are forecasts. S 359,800 300,000 380,000 S1,039,800 500,000 1,680,936 296,216 S1.977,152 S3,516,952 Jamison 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. a. Why are ratios useful? What three groups use ratio analysis and for what reasons? b. Calculate the 2011 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquichty position in 2009, 2010, and as projected for 2011? 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 stock- holders for stock valuation. Would these different types of analysts have an equal inter- est in the liquidity ratios? c. Calculate the 2011 inventory turnover, days sales outstanding (DSO), fixed assets tum- over, and total assets turnover. How does Computron's utilization of assets stack up against that of other firms in its industry Income Statements Sales Cost of goods sold Other expenses Depreciation Total operating costs EBIT Interest expense Taxes (40%) Net income 2009 S3,432,000 2,864,000 340,000 18.900 S3,222,900 S 209,100 62,500 S 146,600 58,640 S87960 2010 55,834,400 4,980,000 720,000 116.960 S5,816,960 S 17,4-10 176,000 (S 158,560) (63.424) (S05.136 2011E $7,035,600 5,800,000 612,960 120,000 S6,532,960 S 502,640 80,000 S422,640 169,056 S 253,584 S S Other Data Stock price S 8.50 S 6.00 Shares outstanding 100,000 100,000 EPS S 0.880 (s 0.951) DPS S 0.220 0.110 Tax rate 40% 40% Book value per share s 6.638 s 5.576 Lease payments S 40,000 $ 40,000 Note: "E" denotes "estimated"; the 2011 data are forecasts. 12.17 250,000 1,014 0.220 40% 7.909 40,000 s 2 Ratio Analysis 2009 2010 2011E Industry Average 2.7 1.0 Current Quick Inventory tumover Days sales outstanding Fixed assets turnover Total assets turnover Debt ratio TIE EBITDA coverage Profit margin Basie earning power ROA ROE Price/Earnings (P/E) Price/Cash flow Market/Book Note: "E" denotes "estimated." 2.3 0.8 4.8 37.3 10.0 2.3 54.8% 3.3 2.6 2.6% 14.2% 6.0% 13.3% 9.7 8,0 1.3 1.5 0.5 4.5 39.6 6.2 2.0 80.7% 0.1 0.8 -1.6% 0.6% -3396 -17.1% -6,3 27.5 1.1 6,1 32.0 7.0 2.5 50.0% 6.2 8.0 3.6% 17.8% 9,0% 17.9% 16.2 7.6 2.9 d. Calculate the 2011 debt, 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 2011 profit margin, basic carning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios? f. Calculate the 2011 price/carnings 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? g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Computron: h. Use the extended Du Pont equation to provide a summary and overview of Compu- tron's financial condition as projected for 2011. What are the firm's major strengths and weaknesses: i. What are some potential problems and limitations of financial ratio analysis j. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance? 3