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Chapter 3 Minicase

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Chapter 3 Mini Case a. Financial ratios are designed to extract important information that might not be obvious simply from examining a firm’s financial statements. The main users of ratios can be broken into three groups managers, creditors, and investors. Each group requires different data, because each function is different. The management team uses ratios to analyze the firm’s operations. Creditors use ratios for a resource of the organizations ability to repay debts. Finally the investors use ratios to gather information about efficiency, risk and growth within the company. Each set of ratios plays a vital part of information for the business. b. Current Ratio (2011E)- (2,680,112/1,039,800)= 2.58
Quick Ratio (2011E)- (2,680,112-1,716,480/ 1,039,800)= .93
Looking at Computron’s liquidity ratios they are slightly below the industry average. Due to the versatility of the liquidity ratios each group of users has a use for the ratios. The creditors use these ratios to analyze if the company can liquidate its assets to meet debt requirements. However an investor would look to the liquidity ratios to evaluate the effectiveness of the company. This is a similar function for the management team. c. Inventory Turnover- (7,035,600/1,716,480)= 4.1
Day Sales Outstanding- (878,000/(7,035,600/365))= 45.6
Fixed Asset Turnover- (7,035,600/836,840)= 8.4
Total Asset Turnover- (7,035,600/3,516,952)= 2
Looking at these ratios Computron’s uses there assets more effectively than the industry, however they tend to take longer to sell there inventory. The day sales outstanding is 12.6 days longer then the industry average. d. Debt Ratio- (1,039,800+500,000/ 3,516,952)= 43.8%
TIE- (502,640/80,000)= 6.3
EBITDA coverage- (502,640+120,000+40,000/80,000+40,000)= 5.52
Overall they have a lower debt rate compared to the industry average, and they are slightly

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