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 Question 1’Jenny Cochran, a graduate of The University of Tennessee with 4 years of experience as an equities analyst, was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components.During the previous year, Computron had doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Cochran was assigned to evaluate the impact of the changes. She began by gathering financial statements and other data. (Data Attached)

  1. What effect did the expansion have on sales and net income? What effect did the expansion have on the asset side of the balance sheet?  What do you conclude from the statement of cash flows?
  2. What is Computron’s net operating profit after taxes (NOPAT)? What are operating current assets? What are operating current liabilities? How much net operating working capital and total net operating capital does Computron have?
  3. What is Computron’s free cash flow (FCF)? What are Computron’s “net uses” of its FCF?
  4. Calculate Computron’s return on invested capital (ROIC). Computron has a 10% cost of capital (WACC). What caused the decline in the ROIC? Was it due to operating profitability or capital utilization? Do you think Computron’s growth added value?
  5. What is Computron’s EVA?  The cost of capital was 10% in both years.
  6. Assume that a corporation has $200,000 of taxable income from operations. What is the company’s federal tax liability?
  7. Assume that you are in the 25% marginal tax bracket and that you have $50,000 to invest. You have narrowed your investment choices down to municipal bonds yielding 7% or equally risky corporate bonds with a yield of 10%. Which one should you choose and why? At what marginal tax rate would you be indifferent?

Question 2James Madison was brought in as assistant to Computron’s chairman, who had the task of getting the company back into a sound financial position.  Madison 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.

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  1. Why are ratios useful? What three groups use ratio analysis and for what reasons?
  2. 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?
  3. 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?
  4. Calculate the current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position and its trend?
  5. 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?
  6. 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?
  7. 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?
  8. What are some potential problems and limitations of financial ratio analysis?
  9. What are some qualitative factors analysts should consider when evaluating a company’s likely future financial performance?

Question 2

Computron’s Balance Sheets (Millions of Dollars)Projection
201820192020E
Assets
Cash and equivalents$ 10,000$ 7,782$ 15,500
Short-term investments52,60025,00072,632
Accounts receivable250,600542,46085,700
Inventories837,9821,546,2521,779,572
Total current assets$ 1,151,182$ 2,121,494$ 1,953,404
Net Fixed Assets882,9821,164,0851,785,600
Total Assets$ 2,034,164$ 3,285,579$ 3,739,004
Liabilities and equity
Accounts payable$ 154,600$ 382,500$ 452,300
Notes payable250,000620,000450,000
Accruals142,000254,700352,000
Total current liabilities$ 546,600$ 1,257,200$ 1,254,300
Long-term bonds245,000800,000700,000
Total liabilities$ 791,600$ 2,057,200$ 1,954,300
Common stock (100,000 shares)1,000,0001,000,0001,000,000
Retained earnings242,564228,379784,704
Total common equity$ 1,242,564$ 1,228,379$ 1,784,704
Total liabilities and equity$ 2,034,164$ 3,285,579$ 3,739,004
Income Statements (Millions of Dollars)Projection
201820192020E
Net sales$ 3,532,000$ 5,648,500$ 7,453,600
Cost of goods sold (Excluding depr.)$ 2,547,000$ 4,687,500$ 5,750,000
Depreciationa$ 16,500$ 187,500$ 150,000
Other operating expenses$ 385,000$ 625,000$ 723,500
Earnings before interest and taxes (EBIT)$ 583,500$ 148,500$ 830,100
Less interest$ 65,200$ 156,000$ 75,000
Pre-tax earnings$ 518,300$ (7,500)$ 755,100
Taxes (25%)$ 129,575$ (1,875)$ 188,775
Net Income$ 388,725$ (5,625)$ 566,325
Notes:
a Computron has no amortization charges.
Additional InformationProjection
201820192020E
Year-end common stock price$8.50$7.50$11.15
Shares outstanding (millions)100,000100,000100,000
Common dividends (millions)$9,500$8,560$10,000
Tax rate25%25%25%
Additions to retained earnings (millions)$379,225-$14,185$556,325
Lease payments (millions)$35,000$35,000$35,000
Per Share InformationProjection
201820192020E
EPS$3.89-$0.06$5.66
DPS$0.10$0.09$0.10
Book Value Per Share$12.43$12.28$17.85
Ratio Analysis201820192020EIndustry Average
Profit margin11.0%-0.1%7.2%
Operating profit margin16.5%2.6%10.4%
Basic earning power28.7%4.5%15.6%
ROA19.1%-0.2%10.8%
ROE31.3%-0.5%15.4%
Inventory turnover3.13.29.0
Days sales outstanding25.935.128.0
Fixed assets turnover4.04.93.0
Total assets turnover1.7361.7191.5
Current2.11.72.5
Quick0.60.51.9
Debt ratio24.3%43.2%15.0%
Debt-to-equity ratio0.401.160.22
Liabilities-to-assets ratio38.9%62.6%32.0%
TIE8.91.013.0
EBITDA coverage6.31.917.2
Price/earnings (P/E)2.2-133.316.8
Market/book0.70.62.7
*Note “E” denotes “estimated”

Question 1

Computron’s Income Statement
20192020
INCOME STATEMENT
Net sales$ 2,059,200$ 3,500,640
Cost of Goods Sold (Except depr. and amort.)$ 1,718,400$ 2,988,000
Other Expenses$ 204,000$ 432,000
Depreciation and amortization$ 11,340$ 70,176
Total Operating Costs$ 1,933,740$ 3,490,176
Earnings before interest and taxes (EBIT)$ 125,460$ 10,464
Less interest$ 37,500$ 105,600
Pre-tax earnings$ 87,960$ (95,136)
Taxes (40%)$ 35,184$ (38,054)
Net Income$ 52,776$ (57,082)
Dividends$ 13,200$ 6,600
Tax rate40%40%
Computron’s Balance Sheets
20192020
Assets
Cash and equivalents$ 5,400$ 4,369
Short-term investments$ 29,160$ 12,000
Accounts receivable$ 210,720$ 379,296
Inventories$ 429,120$ 772,416
Total current assets$ 674,400$ 1,168,081
Gross fixed assets$ 294,600$ 721,770
Less: Accumulated depreciation$ 87,720$ 157,896
Net plant and equipment$ 206,880$ 563,874
Total assets$ 881,280$ 1,731,955
Liabilities and equity
Accounts payable$ 87,360$ 194,400
Notes payable$ 120,000$ 432,000
Accruals$ 81,600$ 170,976
Total current liabilities$ 288,960$ 797,376
Long-term bonds$ 194,059$ 600,000
Common Stock$ 276,000$ 276,000
Retained Earnings$ 122,261$ 58,579
Total Equity$ 398,261$ 334,579
Total Liabilites and Equity$ 881,280$ 1,731,955
Computron’s Statement of Cash Flows
Bart Kreps: The statement of cash flows provides information about cash inflows and outflows during an accounting period.
2020
Operating Activities
Net Income before preferred dividends$ (57,081.60)
Noncash adjustments
Depreciation and amortization$ 70,176.00
Due to changes in working capital
Change in accounts receivable$ (168,576.00)
Change in inventories$ (343,296.00)
Change in accounts payable$ 107,040.00
Change in accruals$ 89,376.00
Net cash provided by operating activities$ (302,361.60)
Investing activities
Cash used to acquire fixed assets$ (427,170.00)
Change in short-term investments$ 17,160.00
Net cash provided by investing activities$ (410,010.00)
Financing Activities
Change in notes payable$ 312,000.00
Change in long-term debt$ 405,940.80
Payment of cash dividends$ (6,600.00)
Net cash provided by financing activities$ 711,340.80
Net change in cash and equivilents$ (1,030.80)
Cash and securities at beginning of the year$ 5,400.00
Cash and securities at end of the year$ 4,369.20
Corporate Tax Rates
If a corporation’s taxable income is between:It pays this amount on the base of the bracket:Plus this percentage on the excess over the base
(1)(2)(3)(4)
$0$50,000$015.0%
$50,000$75,000$7,50025.0%
$75,000$100,000$13,75034.0%
$100,000$335,000$22,25039.0%
$335,000$10,000,000$113,90034.0%
$10,000,000$15,000,000$3,400,00035.0%
$15,000,000$18,333,333$5,150,00038.0%
$18,333,333and up$6,416,66735.0%

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