Question

Fundamental Concepts of Corporate Finance n of Computron lo rather than the po Case yut the finis The first part of the case, presented in Chapter 2, discussed the situation of o put dustries after an expansion program. A large loss occurred in 2010, rather l profit. As a result, its managers are directors, and investors are concerned about Donna Jamison was brought in as assistant to in assistant to Fred Campo, Computron's chai had the back of getting the company back into a sound financial position. Com 2010 balance sheets and income statements, together with projections for 201 2 in the following tables. The tables also show the 2009 and 2010 financial ratios dastry average data. The 2011 projected financial statement data represent Campo's best guess for 2011 results, assuming that some new financing is arranged company over the hump." n's chairman, who Computron's 2009 2011, are shown ratios, along with is nt Jamison's and ranged to get the Balance Sheets 2010 2011E 2009 Assets Cash Short-term investments Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Tocal assets $ 9,000 48,600 351,200 715,200 S1,124,000 491,000 146,200 S 344,800 S1,468.800 S 7.282 20,000 632,160 1.287,360 $1,946,802 1,202,950 263.160 S 939,790 S2.886,592 S 14,000 71,632 878,000 1,716,480 S2,680,112 1,220,000 383.160 S 836,840 $3,516,952 Liabilities and Equity Accounts payable S 145,600 S 324 Notes payable 200,000 720 Accruals 136,000 284,960 Total current liabilities $ 481,600 $1,328,960 Long-term debe 323,432 1,000,000 Common stock (100,000 shares) 460,000 Retained earnings 460,000 203,768 Totalcquity 97,632 Total liabilities and equity $ 663,768 S 557,632 $1,468.800 S2.886,592 Note: "E' denotes "estimated"; the 2011 data are forecasts. S 359,800 300,000 380,000 $1,039,800 500,000 1,680,936 296,216 $1.977,152 $3,516,952 Jamison must prepare an analysis of where the company is now, what it must do to financial health, and what actions should be taken. Your assim following questions. Provide clear cm it must do to regain its

Q1. Calculate the 2011 current and quick ratio based on the projected balance sheet and income statement data.

Q2. What can you say about the company's liquidity position in 2009, 2010, and projected in 2011?

Q3: Calculate the 2011 inventory turnover, days sales outstanding, fixed assets turnover and total assets turnover. How does Computron's utilization of assets stack up against other firms?

Q4: Calculate the 2011, debt, times interest earned and EBITDA coverage ratios. How does Computron compare with industry with respect to financial leverage and what can you conclude from the ratio?

Answer 1

Answer 1:

As per the Balance Sheet of 2011

CURRENT RATIO= CURRENT ASSETS / CURRENT LIABILITIES

=2,680112/1039800= 2.58

QUICK RATIO= QUICK ASSETS / QUICK LIABILITIES

QUICK LIABILITIES= CURRENT LIABILITIES - BANK OVERDRAFT= 1039800

QUICK ASSETS = CURRENT ASSETS - INVENTORIES

= 2680112- 1716480= 963632

THEREFORE QUICK RATIO= 963632/1039800=0. 93

ANSWER 2

It shows that the company has maintained its liquidity position and is expected to do so in 2011 as well as the Current ratios and Quick ratios are favourable. It indicates short term solvency of the company and marks it safe for the creditors making investment in the same.

Debt ratio shows the long term solvency of the company as it is favourable too though it fluctuates .

ANSWER 3:

INVENTORY TURNOVER RATIO = COST OF GOODS SOLD / AVERAGE INVENTORY

AVERAGE INVENTORY = (OPENING INVENTORY +CLOSING INVENTORY)/2

= 1287360+ 1716480/2 = 729500

COST OF GOODS SOLD=5800000

INVENTORY TURNOVER RATIO= 5800000/729500=7. 95 TIMES

DAYS SALES OUTSTANDING= ACCOUNTS RECEIVABLES/ANNUAL SALES *NUMBER OF DAYS

=878000/7035600*365=45.55

FIXED ASSETS TURNOVER= COST OF GOODS SOLD/NET FIXED ASSETS =5800000/836840=6. 93 TIMES

TOTAL ASSETS TURNOVER=NET SALES/ TOTAL ASSETS=7035600/3516952=2.0

From the above ratios we can conclude that Computron is stacking up its assets as compared to the other companies from the industry. It is relying more on its debt and equity to maitain its operations. Also its invetory turnover is high which indicates that it can turn its inventory into sales easily but at the same time it is not utilising its fixed assets most efficiently to generate higher sales.

ANSWER 4.

DEBT RATIO=TOTAL DEBT/ TOTAL ASSETS=(1039800+500000)/3516952* 100=43.78%

TIMES INTEREST EARNED RATIO= INCOME BEFORE INTEREST AND TAXES OR EBIT/INTEREST EXPENSE

=502640/80000=6.283

EBITDA COVERAGE RATIO= (EBITDA+LEASE PAYMENTS)/(INTEREST PAYMENTS+PRINCIPAL REPAYMENTS+LEASE PAYMENTS)

EBITDA=EBIT+DEPRECIATION=502640+120000=622640

EBITDA COVERAGE RATIO=(622640+80000)/(80000+40000)= 5.522

Hence from the above ratios we can conclude that the company is capable of meeting its debt repayment, periodic interest and lease payment obligations. However it has to level up its performance to reach the industrial average. Also regarding financial leverage of the company , it is relying mainly on its equity to finance its assets which is a good sign as shown by the Debt Ratio.