The first part of the case, presented in the previous chapter, discussed the situation of Computron Industries after an expansion program. A large loss occurred rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firms survival.

Jenny Cochran was brought in as assistant to Computrons 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

A. Why are ratios useful? What three groups use ratio analysis and for what reasons?

B. Calculate the profit margin, operating profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?

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?

D. Calculate the current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companys liquidity position and its trend?

E. 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?

F. Calculate the price/earnings 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 (Vertical Analysis) and percent change analysis (Horizontal Analysis). What do these analyses tell you about Computron?

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?

I. What are some potential problems and limitations of financial ratio analysis?

J. What are some qualitative factors analysts should consider when evaluating a companys likely future financial performance?

1 \begin{tabular}{|lrrr|} \hline Additional Information & & \multicolumn{2}{r|}{ Projection } \\ & \multicolumn{1}{l}{2018} & 2019 & 2020E \\ \cline { 2 - 5 } Year-end common stock price & $50.00 & $30.00 & $49.00 \\ Shares outstanding (millions) & 100 & 100 & 100 \\ Common dividends (millions) & $90 & $84 & $100 \\ Tax rate & 25% & 25% & 25% \\ Additions to retained earnings (millions) & $279 & $180 & $290 \\ Lease payments (millions) & $20 & $20 & $20 \\ \hline \end{tabular} \begin{tabular}{|lrrr|} \hline Per Share Information & & & Projection \\ EPS & 2018 & 2019 & 2020E \\ \cline { 2 - 4 } & $3.69 & $2.64 & $3.90 \\ DPS & $0.90 & $0.84 & $1.00 \\ Book Value Per Share & $27.30 & $29.10 & $32.00 \\ \hline \end{tabular} 1 \begin{tabular}{|lrrr|} \hline Additional Information & & \multicolumn{2}{r|}{ Projection } \\ & \multicolumn{1}{l}{2018} & 2019 & 2020E \\ \cline { 2 - 5 } Year-end common stock price & $50.00 & $30.00 & $49.00 \\ Shares outstanding (millions) & 100 & 100 & 100 \\ Common dividends (millions) & $90 & $84 & $100 \\ Tax rate & 25% & 25% & 25% \\ Additions to retained earnings (millions) & $279 & $180 & $290 \\ Lease payments (millions) & $20 & $20 & $20 \\ \hline \end{tabular} \begin{tabular}{|lrrr|} \hline Per Share Information & & & Projection \\ EPS & 2018 & 2019 & 2020E \\ \cline { 2 - 4 } & $3.69 & $2.64 & $3.90 \\ DPS & $0.90 & $0.84 & $1.00 \\ Book Value Per Share & $27.30 & $29.10 & $32.00 \\ \hline \end{tabular}