Computron Case

MINI CASE: CAPITAL BUDGETING, FINANCIAL MANAGEMENT & CASH FLOW

You are, a recent graduate of the University of Tennessee with four years of banking experience, were recently brought in as assistant to the chairman of the board of Computron Industries, a manufacturer of electronic calculators.

The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. Computron’s results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president and vice-president plus its major stockholders (who were all local business people), was most upset when directors learned how the expansion was going. Suppliers were being paid late and were unhappy, and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, Al Watkins, Computron’s president, was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board’s insistence you were brought in and given the job of assistant to Fred Campo, a retired banker who was Computron’s chairman and largest stockholder. Campo agreed to give up a few of his golfing days and to help nurse the company back to health, with your help.

You began by gathering financial statements and other data, and you must help to answer the following questions for Campo.

Balance Sheets

Assets 2006 2007

Cash $ 9,000 $ 7,282

Short-term investments. 48,600 20,000

Accounts receivable 351,200 632,160

Inventories 715,200 1,287,360

total current assets $ 1,124,000 $ 1,946,802

Gross fixed assets 491,000 1,202,950

Less: accumulated depreciation 146,200 263,160

net fixed assets $ 344,800 $ 939,790

Total assets $ 1,468,800 $ 2,886,592

Liabilities and equity 2006 2007

Accounts payable $ 145,600 $ 324,000

Notes payable 200,000 720,000

Accruals 136,000 284,960

total current liabilities $ 481,600 $ 1,328,960

Long-term debt 323,432 1,000,000

Common stock (100,000 shares) 460,000 460,000

Retained earnings 203,768 97,632

total equity $ 663,768 $ 557,632

Total liabilities and equity $ 1,468,800 $ 2,886,592

Income Statements

2006 2007

Sales $ 3,432,000 $ 5,834,400

Cost of goods sold 2,864,000 4,980,000

Other expenses 340,000 720,000

Depreciation 18,900 116,960

total operating costs $ 3,222,900 $ 5,816,960

EBIT $ 209,100 $ 17,440

Interest expense 62,500 176,000

EBT $ 146,600 $ (158,560)

Taxes (40%) 58,640 (63,424)

Net income $ 87,960 $ (95,136)

Other data 2006 2007

Stock price $ 8.50 $ 6.00

Shares outstanding 100,000 100,000

EPS $ 0.880 $ (0.951)

DPS $ 0.220 $ 0.110

Statement of

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