Financial Statements

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Financial Statements & Ratios

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Excel Module Week 1 - Financial Statements & Ratios (20 points) Computron Industries recently expanded its operations. The firm was anticipating a profit after expandion, but instead a large loss occurred. As a result, its managers, directors, and investors are concerned about the firm’s survival. Jenny Cochran was brought in as assistant to Computron’s 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 answers. Input Data: 2015 2016 2017E $8.50 100,000 40% $40,000 $6.00 100,000 40% $40,000 $12.17 250,000 40% $40,000 2015 2016 2017E Cash and equivalents Short-term investments Accounts receivable Inventories Total current assets Gross Fixed Assets Less Accumulated Dep. Net Fixed Assets Total Assets $9,000 $48,600 $351,200 $715,200 $1,124,000 $491,000 $146,200 $344,800 $1,468,800 $7,282 $20,000 $632,160 $1,287,360 $1,946,802 $1,202,950 $263,160 $939,790 $2,886,592 $14,000 $71,632 $878,000 $1,716,480 $2,680,112 $1,220,000 $383,160 $836,840 $3,516,952 Liabilities and equity Accounts payable Notes payable Accruals Total current liabilities Long-term bonds Total liabilities Common stock (100,000 shares) Retained earnings Total common equity Total liabilities and equity $145,600 $200,000 $136,000 $481,600 $323,432 $805,032 $460,000 $203,768 $663,768 $1,468,800 $324,000 $720,000 $284,960 $1,328,960 $1,000,000 $2,328,960 $460,000 $97,632 $557,632 $2,886,592 $359,800 $300,000 $380,000 $1,039,800 $500,000 $1,539,800 $1,680,936 $296,216 $1,977,152 $3,516,952 Year-end common stock price Year-end shares outstanding Tax rate Lease payments Balance Sheets Assets Income Statements Net sales Costs of Goods Sold Except Depr. Depreciation and amortization Other Expenses Total Operating Cost Earnings before interest and taxes (EBIT) Less interest Pre-tax earnings Taxes (40%) Net Income before preferred dividends EPS DPS Book Value Per Share 2015 2016 2017E $3,432,000 $2,864,000 $18,900 $340,000 $3,222,900 $209,100 $62,500 $146,600 $58,640 $87,960 $5,834,400 $4,980,000 $116,960 $720,000 $5,816,960 $17,440 $176,000 ($158,560) ($63,424) ($95,136) $7,035,600 $5,800,000 $120,000 $612,960 $6,532,960 $502,640 $80,000 $422,640 $169,056 $253,584 $0.880 $0.220 $6.638 ($0.951) $0.110 $5.576 $1.014 $0.220 $7.909 Cochran 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. 1. Name 3 groups that use ratio analysis and why use this type of analysis. (1 point) 2. Calculate the current and quick ratios based on the projected balance sheet and income statement data shown above. (1 point) Calculated Data: Ratios 2015 Liquidity ratios Current Ratio Quick Ratio 2016 2017E Industry Average 2.70 1.00 3. What can you say about the company's liquidity position between years? As compared to industry average? (2 points) 4. Calculate the inventory turnover, days sales outstanding, fixed asset turnover, operating capital requirement, and total assets turnover. (1 point) Asset Management ratios 2015 2016 2017E Inventory Turnover Days Sales Outstanding Fixed Asset Turnover Total Asset Turnover Industry Average 6.10 32.00 7.00 2.50 5. What can you say about the company's utilization of assets between years? As compared to industry average? (2 points) 6. Calculate the debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios. (1 point) Debt Management ratios Debt Ratio Liabilities to Assets Ratio Times Interest Earned EBITDA Coverage Ratio 2015 2016 2017E Industry Average 32.0% 50.0% 6.20 8.00 7. What can you say about the company's financial leverage (use of debt) between years? As compared to industry average? (2 point) 7. What can you say about the company's financial leverage (use of debt) between years? As compared to industry average? (2 point) 8. Calculate the profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). (1 point) Profitability ratios 2015 2016 2017E Net Profit Margin Operating Margin Gross Profit Margin Basic Earning Power Return on Assets Return on Equity Industry Average 3.6% 7.1% 15.5% 17.8% 9.0% 18.0% 9. What can you say about these ratios? (2 points) 10. Calculate the price/earnings ratio, price/cash flow ratio, and market/book ratio. (1 point) Market Value ratios Earning Per Share Price-to Earnings Ratio Market Price Per Share Book Value Per Share Market-to-Book Ratio 2015 2016 2017E Industry Average na 14.20 na na 2.90 11. Do these ratios indicate that investors are expected to have a high or low opinion of the company? (1 point) 12. Use the extended DuPont equation to provide a summary and overview of Computron's projected financial condition. (2 points) DuPont Analysis ROE = PM X TAT X Equity Multiplier Computron 2015 Computron 2016 Computron 2017E Industry Average 18.00% 0.0% 2.5 2.00 13. Interpret the Dupont Equation Results to determine firm's strengths & weaknesses(2 points) 14. What are some potential problems and limitations of financial ratio analysis? (1 point) Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Current Assets - Inventories) / Current Liabilities Inventory Turnover = (Cost of Goods Sold + Depreciation & Amortization) / Inventory Days Sales Outstanding = Accounts Receivable / (Net Sales / 365) Fixed Assets Turnover = Net Sales / Net Fixed Assets Total Assets Turnover = Net Sales / Total Assets Debt Ratio [Leverage Ratio]= (Notes payable + Long Term Bonds) / Total Assets Liabilities to Assets Ratio = Total Debt / Total Assets Times-interest-earned ratio = EBIT/Interest Expense EBITDA coverage ratio = (EBITDA + Lease Payments) / (Interest Payments + Principal Payments + Lease Payme EBITDA = EBIT + Depreciation + Amortization NOTE: Lease payments shown above balance sheet EBIT = Earnings before interest & Taxes EBITDA = Earnings before interest, taxes, depreciation & amortization Profit Margin = Net Income / Net Sales Operating Margin = EBIT / Net Sales Gross Profit Margin = Net Income / (Sales - Cost of Goods Sold) Basic Earning Power Ratio [Return on Investment]= EBIT / Total Assets ROA = Net Income / Total Assets ROE = Net Income/Shareholders Equity = Net Income / (Total Assets - Total Liabilities) ) NOTE: stock data located above balance sheet EPS = Net income / outstanding shares of common stock PE Ratio = Market Price Per Share / EPS Market Price Per Share = See current price in stock data above balance sheet Book Value per share = Calculated above in income statement Market to Book Ratio = Market Price per share /Book Price per share ROE = Return on Equity PM = Profit Margin TATO = Total Asset Turnover Equity Multiplier = Total Assets / Stockholders Equity [ called common equity in this spreadsheet] Payments + Lease Payments) ity in this spreadsheet]
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