Reference no: EM132618550

Case 1 Situation

Mary Smith, a recent graduate of the UCW , was recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of computer components.Computron Industries luanched an expansion program. A large loss occurred in 2015, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

Mary Smith was brought in as assistant to John Wesley, Computron's chairman, who had the task of getting the company back into a sound financial position. Computron's 2018 and 2019 balance sheets and income statements, together with projections for 2020, are shown in the following tables. The tables also show the 2018 and 2019 financial ratios, along with industry average data. The 2020 projected financial statement data represent Wesley's best guess for 2020 results, assuming that some new financing is arranged to get the company "over the hump."

Input Data:

			2018	2019	2020
Year-end common stock price			$8.50	$6.00	$12.17
Year-end shares outstanding			100,000	100,000	250,000
Tax rate			40%	40%	40%
Lease payments			$40,000	$40,000	$40,000

Balance Sheets
Assets			2018	2019	2020
Cash and equivalents			$9,000	$7,282	$14,000
Short-term investments			$48,600	$20,000	$71,632
Accounts receivable			$351,200	$632,160	$878,000
Inventories			$715,200	$1,287,360	$1,716,480
Total current assets			$1,124,000	$1,946,802	$2,680,112
Gross Fixed Assets			$491,000	$1,202,950	$1,220,000
Less Accumulated Dep.			$146,200	$263,160	$383,160
Net Fixed Assets			$344,800	$939,790	$836,840
Total Assets			$1,468,800	$2,886,592	$3,516,952
Liabilities and equity
Accounts payable			$145,600	$324,000	$359,800
Notes payable			$200,000	$720,000	$300,000
Accruals			$136,000	$284,960	$380,000
Total current liabilities			$481,600	$1,328,960	$1,039,800
Long-term bonds			$323,432	$1,000,000	$500,000
Total liabilities			$805,032	$2,328,960	$1,539,800
Common stock (100,000 shares)			$460,000	$460,000	$1,680,936
Retained earnings			$203,768	$97,632	$296,216
Total common equity			$663,768	$557,632	$1,977,152
Total liabilities and equity			$1,468,800	$2,886,592	$3,516,952
Income Statements
			2018	2019	2020
Net sales			$3,432,000	$5,834,400	$7,035,600
Costs of Goods Sold Except Depr.			$2,864,000	$4,980,000	$5,800,000
Depreciation and amortization			$18,900	$116,960	$120,000
Other Expenses			$340,000	$720,000	$612,960
Total Operating Cost			$3,222,900	$5,816,960	$6,532,960
Earnings before interest and taxes (EBIT)			$209,100	$17,440	$502,640
Less interest			$62,500	$176,000	$80,000
Pre-tax earnings			$146,600	($158,560)	$422,640
Taxes (40%)			$58,640	($63,424)	$169,056
Net Income before preferred dividends			$87,960	($95,136)	$253,584
EPS			$0.880	($0.951)	$1.014
DPS			$0.220	$0.110	$0.220
Book Value Per Share			$6.638	$5.576	$7.909

Mary 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.

a. Why are ratios useful? What five groups use ratio analysis and for what reasons?

b. (1.) Calculate the current and quick ratios based on the projected balance sheet and income statement data.

(2.) What can you say about the company's liquidity position? 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?

c. Calculate the inventory turnover, fixed assets turnover, and total assets turnover. How does Computron's utilization of assets stack up against other firms in its industry?

d. 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?

e. Calculate the profit margin, return on assets (ROA), and return on equity (ROE). What can you say about these ratios?

f. Calculate the price/earnings ratio, price/cash flow ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?

g. 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?

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

Case 2 Situation

Sam Forbes and Jenny Hewes are senior vice-presidents of the First Creek Investment Council . They are co-directors of the company's pension fund management division, with Sam having responsibility for fixed income securities (primarily bonds) and Jneey being responsible for equity investments. A major new client has requested that council present an investment seminar to Executive Committee, and Forbes and Hewes, who will make the actual presentation, have asked you, a recent UCW graduate to help them.

To illustrate the common stock valuation process, Sam and Jenny have asked you to analyze the Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions.

a. Describe briefly the legal rights and privileges of common stockholders.

b. Assume that Temp Force is a constant growth company whose last dividend (Do, which was paid yesterday) was $2.00, and whose dividend is expected to grow indefinitely at a 5 percent rate.

(1.) What is the firm's expected dividend stream over the next 3 years?
(2.) What is the firm's current stock price?
(3.) What is the stock's expected value 1 year from now?
(4.) What are the expected dividend yield, the capital gains yield, and the total return during the first year?

c. Now assume that the stock is currently selling at $43.75. What is the expected rate of return on the stock?

f. What would the stock price be if its dividends were expected to have zero growth?

g. Now assume that Temp Force is expected to experience supernormal growth of 30 percent for the next 3 years, then to return to its long-run constant growth rate of 5 percent. What is the stock's value under these conditions? What is its expected dividend yield and capital gains yield in Year 1? In Year 4?

h. Is the stock price based more on long-term or short-term expectations? Answer this by finding the percentage of Temp Force current stock price based on dividends expected more than 3 years in the future.

i. Suppose Temp Force is expected to experience zero growth during the first 3 years and then to resume its steady-state growth of 5% in the fourth year. What is the stock's value now? What is its expected dividend yield and its capital gains yield in Year 1? In Year 4? (2marks)

j. Finally, assume that Temp Force's earnings and dividends are expected to decline by a constant 6 percent per year, that is, g = -5%. Why would anyone be willing to buy such a stock and at what price should it sell? What would be the dividend yield and capital gains yield in each year?

l. Temp Force recently issued preferred stock. It pays an annual dividend of $1.60, and the issue price was $25 per share. What is the expected return to an investor on this preferred stock?

Attachment:- Midterm.rar