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Dokumen - Tips - fm11 CH 13 Mini Case Old3
Dokumen - Tips - fm11 CH 13 Mini Case Old3
THE FIRST PART OF THE CASE, PRESENTED IN CHAPTER 3, DISCUSSED THE SITUATION THAT
COMPUTRON INDUSTRIES WAS IN AFTER AN EXPANSION PROGRAM. THUS FAR, SALES HAVE NOT
BEEN UP TO THE FORECASTED LEVEL, COSTS HAVE BEEN HIGHER THAN WERE PROJECTED, AND
A LARGE LOSS OCCURRED IN 2001, 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 2000 AND 2001 BALANCE SHEETS AND INCOME STATEMENTS, TOGETHER WITH
PROJECTIONS FOR 2002, ARE SHOWN IN THE FOLLOWING TABLES. ALSO, THE TABLES SHOW
THE 2000 AND 2001 FINANCIAL RATIOS, ALONG WITH INDUSTRY AVERAGE DATA. THE 2002
PROJECTED FINANCIAL STATEMENT DATA REPRESENT JAMISON’S AND CAMPO’S BEST GUESS FOR
2002 RESULTS, ASSUMING THAT SOME NEW FINANCING IS ARRANGED TO GET THE COMPANY
“OVER THE HUMP.”
JAMISON EXAMINED MONTHLY DATA FOR 2001 (NOT GIVEN IN THE CASE), AND SHE
DETECTED AN IMPROVING PATTERN DURING THE YEAR. MONTHLY SALES WERE RISING, COSTS
WERE FALLING, AND LARGE LOSSES IN THE EARLY MONTHS HAD TURNED TO A SMALL PROFIT
BY DECEMBER. THUS, THE ANNUAL DATA LOOKED SOMEWHAT WORSE THAN FINAL MONTHLY
DATA. ALSO, IT APPEARS TO BE TAKING LONGER FOR THE ADVERTISING PROGRAM TO GET
THE MESSAGE ACROSS, FOR THE NEW SALES OFFICES TO GENERATE SALES, AND FOR THE NEW
MANUFACTURING FACILITIES TO OPERATE EFFICIENTLY. IN OTHER WORDS, THE LAGS
BETWEEN SPENDING MONEY AND DERIVING BENEFITS WERE LONGER THAN COMPUTRON’S
MANAGERS HAD ANTICIPATED. FOR THESE REASONS, JAMISON AND CAMPO SEE HOPE FOR THE
COMPANY--PROVIDED IT CAN SURVIVE IN THE SHORT RUN.
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.
Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc. Mini Case: 3 - 1
BALANCE SHEETS
INCOME STATEMENTS
Mini Case: 3 - 2 Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.
RATIO ANALYSIS
INDUSTRY
2002E 2001 2000 AVERAGE
CURRENT 1.1 2.3 2.7
QUICK 0.4 0.8 1.0
INVENTORY TURNOVER 4.5 4.8 6.1
DAYS SALES OUTSTANDING (DSO) 39.0 36.8 32.0
FIXED ASSETS TURNOVER 6.2 10.0 7.0
TOTAL ASSETS TURNOVER 2.0 2.3 2.5
DEBT RATIO 95.4% 54.8% 50.0%
TIE -3.9 3.3 6.2
EBITDA COVERAGE -2.5 2.6 8.0
PROFIT MARGIN -8.9% 2.6% 3.6%
BASIC EARNING POWER -24.1% 14.2% 17.8%
ROA -18.1% 6.0% 9.0%
ROE -391.4% 13.3% 18.0%
PRICE/EARNINGS -0.4 9.7 14.2
PRICE/CASH FLOW -0.6 8.0 7.6
MARKET/BOOK 1.7 1.3 2.9
BOOK VALUE PER SHARE $1.33 $6.64 N.A.
Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc. Mini Case: 3 - 3
A. WHY ARE RATIOS USEFUL? WHAT ARE THE FIVE MAJOR CATEGORIES OF RATIOS?
ANSWER: RATIOS ARE USED BY MANAGERS TO HELP IMPROVE THE FIRM’S PERFORMANCE, BY
LENDERS TO HELP EVALUATE THE FIRM’S LIKELIHOOD OF REPAYING DEBTS, AND
BY STOCKHOLDERS TO HELP FORECAST FUTURE EARNINGS AND DIVIDENDS. THE
FIVE MAJOR CATEGORIES OF RATIOS ARE: LIQUIDITY, ASSET MANAGEMENT, DEBT
MANAGEMENT, PROFITABILITY, AND MARKET VALUE.
B. CALCULATE THE 2002 CURRENT AND QUICK RATIOS BASED ON THE PROJECTED
BALANCE SHEET AND INCOME STATEMENT DATA. WHAT CAN YOU SAY ABOUT THE
COMPANY’S LIQUIDITY POSITION IN 2000, 2001, AND AS PROJECTED FOR 2002?
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
STOCKHOLDERS FOR STOCK VALUATION. WOULD THESE DIFFERENT TYPES OF
ANALYSTS HAVE AN EQUAL INTEREST IN THE LIQUIDITY RATIOS?
THE COMPANY’S CURRENT AND QUICK RATIOS ARE LOW RELATIVE TO ITS 2000
CURRENT AND QUICK RATIOS; HOWEVER, THEY HAVE IMPROVED FROM THEIR 2001
LEVELS. BOTH RATIOS ARE WELL BELOW THE INDUSTRY AVERAGE, HOWEVER.
DSO02 = RECEIVABLES/(SALES/360)
= $878,000/($7,035,600/360) = 44.9 DAYS.
Mini Case: 3 - 4 Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.
FIXED ASSETS TURNOVER02 = SALES/NET FIXED ASSETS
= $7,035,600/$817,040 = 8.61.
THE FIRM’S DEBT RATIO IS MUCH IMPROVED FROM 2001, BUT IT IS STILL
ABOVE ITS 2000 LEVEL AND THE INDUSTRY AVERAGE. THE FIRM’S TIE AND
EBITDA COVERAGE RATIOS ARE MUCH IMPROVED FROM THEIR 2000 AND 2001
Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc. Mini Case: 3 - 5
LEVELS, BUT THEY ARE STILL BELOW THE INDUSTRY AVERAGE.
E. CALCULATE THE 2002 PROFIT MARGIN, BASIC EARNING POWER (BEP), RETURN ON
ASSETS (ROA), AND RETURN ON EQUITY (ROE). WHAT CAN YOU SAY ABOUT THESE
RATIOS?
THE FIRM’S PROFIT MARGIN IS ABOVE 2000 AND 2001 LEVELS AND IS AT THE
INDUSTRY AVERAGE. THE BASIC EARNING POWER, ROA, AND ROE RATIOS ARE
ABOVE BOTH 2000 AND 2001 LEVELS, BUT BELOW THE INDUSTRY AVERAGE DUE TO
POOR ASSET UTILIZATION.
Mini Case: 3 - 6 Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.
BOTH THE P/E RATIO AND BVPS ARE ABOVE THE 2000 AND 2001 LEVELS BUT
BELOW THE INDUSTRY AVERAGE.
ANSWER: FOR THE COMMON SIZE BALANCE SHEETS, DIVIDE ALL ITEMS IN A YEAR BY THE
TOTAL ASSETS FOR THAT YEAR. FOR THE COMMON SIZE INCOME STATEMENTS,
DIVIDE ALL ITEMS IN A YEAR BY THE SALES IN THAT YEAR.
Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc. Mini Case: 3 - 7
COMPUTRON HAS HIGHER PROPORTION OF CURRENT ASSETS (49.1%) THAN
INDUSTRY (41.2%). COMPUTRON HAS SLIGHTLY LESS EQUITY (WHICH MEANS MORE
DEBT) THAN INDUSTRY. COMPUTRON HAS MORE SHORT-TERM DEBT THAN INDUSTRY,
BUT LESS LONG-TERM DEBT THAN INDUSTRY. COMPUTRON HAS HIGHER COGS
(86.7) THAN INDUSTRY (84.5), BUT LOWER DEPRECIATION. RESULT IS THAT
COMPUTRON HAS SIMILAR EBIT (7.1) AS INDUSTRY.
FOR THE PERCENT CHANGE ANALYSIS, DIVIDE ALL ITEMS IN A ROW BY THE
VALUE IN THE FIRST YEAR OF THE ANALYSIS.
Mini Case: 3 - 8 Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.
Percent Change Income
statement
2000 2001 2002E
Sales 0.0% 70.0% 105.0%
COGS 0.0% 100.0% 113.0%
Other exp. 0.0% 100.0% -8.0%
Depr. 0.0% 518.8% 534.9%
EBIT 0.0% -430.3% 140.4%
Int. Exp. 0.0% 181.6% 28.0%
EBT 0.0% -691.1% 188.3%
Taxes 0.0% -691.1% 188.3%
NI 0.0% -691.1% 188.3%
WE SEE THAT 2002 SALES GROW 105% FROM 2000, AND THAT NI GROWS
188% FROM 2000. SO COMPUTRON HAS BECOME MORE PROFITABLE. WE SEE
THAT TOTAL ASSETS GROW AT A RATE OF 138%, WHILE SALES GROW AT A RATE
OF ONLY 105%. SO ASSET UTILIZATION REMAINS A PROBLEM.
STRENGTHS: THE FIRM’S FIXED ASSETS TURNOVER WAS ABOVE THE INDUSTRY
AVERAGE. HOWEVER, IF THE FIRM’S ASSETS WERE OLDER THAN OTHER FIRMS IN
ITS INDUSTRY THIS COULD POSSIBLY ACCOUNT FOR THE HIGHER RATIO.
(COMPUTRON’S FIXED ASSETS WOULD HAVE A LOWER HISTORICAL COST AND WOULD
HAVE BEEN DEPRECIATED FOR LONGER PERIODS OF TIME.) THE FIRM’S PROFIT
MARGIN IS SLIGHTLY ABOVE THE INDUSTRY AVERAGE, DESPITE ITS HIGHER DEBT
RATIO. THIS WOULD INDICATE THAT THE FIRM HAS KEPT COSTS DOWN, BUT,
AGAIN, THIS COULD BE RELATED TO LOWER DEPRECIATION COSTS.
WEAKNESSES: THE FIRM’S LIQUIDITY RATIOS ARE LOW; MOST OF ITS ASSET
MANAGEMENT RATIOS ARE POOR (EXCEPT FIXED ASSETS TURNOVER); ITS DEBT
MANAGEMENT RATIOS ARE POOR, MOST OF ITS PROFITABILITY RATIOS ARE LOW
(EXCEPT PROFIT MARGIN); AND ITS MARKET VALUE RATIOS ARE LOW.
Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc. Mini Case: 3 - 9
I. USE THE FOLLOWING SIMPLIFIED 2002 BALANCE SHEET TO SHOW, IN GENERAL
TERMS, HOW AN IMPROVEMENT IN THE DSO WOULD TEND TO AFFECT THE STOCK
PRICE. FOR EXAMPLE, IF THE COMPANY COULD IMPROVE ITS COLLECTION
PROCEDURES AND THEREBY LOWER ITS DSO FROM 44.9 DAYS TO THE 32-DAY
INDUSTRY AVERAGE WITHOUT AFFECTING SALES, HOW WOULD THAT CHANGE “RIPPLE
THROUGH” THE FINANCIAL STATEMENTS (SHOWN IN THOUSANDS BELOW) AND
INFLUENCE THE STOCK PRICE?
ANSWER: THE INVENTORY TURNOVER RATIO IS LOW. IT APPEARS THAT THE FIRM EITHER
HAS EXCESSIVE INVENTORY OR SOME OF THE INVENTORY IS OBSOLETE. IF
INVENTORY WERE REDUCED, THIS WOULD IMPROVE THE LIQUIDITY RATIOS, THE
INVENTORY AND TOTAL ASSETS TURNOVER, AND THE DEBT RATIO, WHICH SHOULD
IMPROVE THE FIRM’S STOCK PRICE AND PROFITABILITY.
Mini Case: 3 - 10 Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.
K. IN 2001, THE COMPANY PAID ITS SUPPLIERS MUCH LATER THAN THE DUE DATES,
AND IT WAS NOT MAINTAINING FINANCIAL RATIOS AT LEVELS CALLED FOR IN ITS
BANK LOAN AGREEMENTS. THEREFORE, SUPPLIERS COULD CUT THE COMPANY OFF,
AND ITS BANK COULD REFUSE TO RENEW THE LOAN WHEN IT COMES DUE IN 90
DAYS. ON THE BASIS OF DATA PROVIDED, WOULD YOU, AS A CREDIT MANAGER,
CONTINUE TO SELL TO COMPUTRON ON CREDIT? (YOU COULD DEMAND CASH ON
DELIVERY, THAT IS, SELL ON TERMS OF COD, BUT THAT MIGHT CAUSE COMPUTRON
TO STOP BUYING FROM YOUR COMPANY.) SIMILARLY, IF YOU WERE THE BANK
LOAN OFFICER, WOULD YOU RECOMMEND RENEWING THE LOAN OR DEMAND ITS
REPAYMENT? WOULD YOUR ACTIONS BE INFLUENCED IF, IN EARLY 2002,
COMPUTRON SHOWED YOU ITS 2002 PROJECTIONS PLUS PROOF THAT IT WAS GOING
TO RAISE OVER $1.2 MILLION OF NEW EQUITY CAPITAL?
ANSWER: WHILE THE FIRM’S RATIOS BASED ON THE PROJECTED DATA APPEAR TO BE
IMPROVING, THE FIRM’S LIQUIDITY RATIOS ARE LOW. AS A CREDIT MANAGER, I
WOULD NOT CONTINUE TO EXTEND CREDIT TO THE FIRM UNDER ITS CURRENT
ARRANGEMENT, PARTICULARLY IF I DIDN’T HAVE ANY EXCESS CAPACITY. TERMS
OF COD MIGHT BE A LITTLE HARSH AND MIGHT PUSH THE FIRM INTO BANKRUPTCY.
LIKEWISE, IF THE BANK DEMANDED REPAYMENT THIS COULD ALSO FORCE THE FIRM
INTO BANKRUPTCY.
CREDITORS’ ACTIONS WOULD DEFINITELY BE INFLUENCED BY AN INFUSION OF
EQUITY CAPITAL IN THE FIRM. THIS WOULD LOWER THE FIRM’S DEBT RATIO AND
CREDITORS’ RISK EXPOSURE.
ANSWER: BEFORE THE COMPANY TOOK ON ITS EXPANSION PLANS, IT SHOULD HAVE DONE AN
EXTENSIVE RATIO ANALYSIS TO DETERMINE THE EFFECTS OF ITS PROPOSED
EXPANSION ON THE FIRM’S OPERATIONS. HAD THE RATIO ANALYSIS BEEN
CONDUCTED, THE COMPANY WOULD HAVE “GOTTEN ITS HOUSE IN ORDER” BEFORE
UNDERGOING THE EXPANSION.
Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc. Mini Case: 3 - 11
1. COMPARISON WITH INDUSTRY AVERAGES IS DIFFICULT IF THE FIRM OPERATES
MANY DIFFERENT DIVISIONS.
2. TO WHAT EXTENT ARE THE COMPANY’S REVENUES TIED TO ONE KEY PRODUCT?
5. COMPETITION
6. FUTURE PROSPECTS
Mini Case: 3 - 12 Harcourt, Inc. items and derived items copyright © 2002 by Harcourt, Inc.