MGMT-6005 Group Assignment Refer Mini-Case: D'Leon Inc. Part I &II (pp. 96-99) and (pp. 138-140) of the Textbook Requirement: Discuss with your group members and submit your responses to the following questions: 1) Show the Free Cash Flows (FCFS) for D'Leon Inc. INTEGRATED CASE D'LEON INC., PART FINANCIAL STATEMENTS AND TAXES Donna Jamison, a 2011 graduate of the University of Florida, with 4 years of banking experience, was recently brought in as assistant to the chairperson of the board of D'Leon Inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack foods market. D'Leon's president, Al Watkins, decided in 2015 to undertake a major expansion and to "go national" in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D'Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and stock price. The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D'Leon's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president, vice president, and major stockholders (all of whom were local businesspeople), was most upset when directors learned how the expansion was going. Unhappy suppliers situation and threatening to cut off credit. As a result, Watkins was informed that changes would have to be made-and quickly; otherwise, he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, chairperson and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's help. Jamison began by gathering the financial statements and other data given in Tables IC 3.1, IC 3.2, IC 3.3, and IC 3.4. Assume that you are Jamison's assistant. You must help her answer the following questions for Campo. (Note: We will continue with this case in Chapter 4, and you will feel more comfortable with the analysis there. But answering these questions will help prepare you for Chapter 4. Provide clear explanations.) 3-20 being paid late; and the bank was complaining about the deteriorating were a retired banker who was D'Leon's Balance Sheet 2015 2016 Assets Cash 57,600 7,282 S Accounts receivable 351,200 632,160 Inventories 715,200 1,287,360 Total current assets $1,124,000 $1,926,802 Gross fixed assets 491,000 1,202,950 Less accumulated depreciation 146,200 263,160 Net fixed assets $ 344,800 $ 939,790 Total assets $2,866,592 $1,468,800 Liabilities and Equity Accounts payable $ 524,160 $ 145,600 Accruals 489,600 136,000 Notes payable 636,808 200,000 Total current liabilities $1,650,568 $ 481,600 Long-term debt Common stock (100,000 shares) 723,432 323,432 460,000 460,000 Retained earnings 32,592 203,768 Total equity $ 492,592 663,768 $1,468,800 $2,866,592 Total liabilities and equity uld 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 D'Leon on credit? (You could demand cash on delivery-that is, sell on terms of COD-but that might cause D'Leon to stop buying from your company.) Similarly, if you were the bank loan officer, would you recommend renewing the loan or demanding its repayment? Would your actions be influenced if, in early 2017, DLeon showed you its 2017 projections along with proof that it was going to raise more than $1.2 million of new equity? . In hindsight, what should D'Leon have done in 2015? 1 What are some potential problems and limitations of financial ratio analysis? What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance? Balance Sheets TABLE IC 4.1 2015 2017E 2016 Assets Cash $ 57,600 7,282 85,632 Accounts receivable 878,000 351,200 632,160 Inventories 715,200 1,287,360 1,716,480 Total current assets Gross fixed assets $1,926,802 $1,124,000 $2,680,112 491,000 1,202,950 1,197,160 Less accumulated depreciation 263,160 $ 939,790 146,200 380,120 Net fixed assets 344,800 $ 817,040 Total assets $2.866,592 $1,468,800 $3,497,152 Liabilities and Equity Accounts payable 145,600 $ 436,800 524,160 489,600 136,000 Accruals 408,000 Notes payable 200,000 636,808 300,000 $1,650,568 481,600 Total current liabilities $1,144,800 323,432 400,000 723,432 Long-term debt 460,000 460,000 1,721,176 Common stock 32,592 $ 492,592 203,768 Retained earnings Total equity 231,176 $ 663,768 $1,468,800 $1,952,352 $2,866,592 $3,497,152 Total liabilities and equity Note: E indicates estimated. The 2017 data are forecasts TABLE IC 3.2 Income Statements 2015 2016 $6,034,000 $3,432,000 Sales 5,528,000 2,864,000 Cost of goods sold 519,988 358,672 Other expenses Total operating costs excluding depreciation and amortization Depreciation and amortization $6,047,988 $3,222,672 116,960 18,900 S 190,428 (S 130,948) EBIT 136,012 43,828 Interest expense $ 146,600 (S 266,960) EBT (106,784) (S 160,176) 58,640 Taxes (40%) $ 87,960 Net income (S 1.602) 0.880 EPS 0.110 0.220 DPS Book value per share 4.926 $ 6.638 Stock price 2.25 8.50 Shares outstanding 100,000 100,000 Tax rate 40.00% 40.00% $ 40,000 S 40,000 Lease payments Sinking fund payments 0 0 The firm had sufficient taxable income in 2014 and 2015 to obtain its full tax refund in 2016. Statement of Stockholders' Equity, 2016 TABLE IC 3.3 Common Stock Retained Total Stockholders' Amount Earnings Shares Equity $ 663,768 Balances, December 31, 2015 100,000 $460,000 $203,768 2016 Net income (160,176) Cash dividends (11,000) Addition (subtraction) to retained earnings Balances, December 31, 2016 (171,176) $ 492,592 32,592 100,000 $460,000 99 Chapter 3 Financial Statements, Cash Flow, and Taxes TABLE IC 3.4 Statement of Cash Flows, 2016 Operating Activities ($160,176) 116,960 Net income Depreciation and amortization Increase in accounts payable Increase in accruals 378,560 353,600 (280,960) Increase in accounts receivable (572,160) ($ 164,176) Increase in inventories Net cash provided by operating activities Long-Term Investing Activities Additions to property, plant, and equipment Net cash used in investing activities (S 711,950) (S 711,950) Financing Activities Increase in notes payable Increase in long-term debt $ 436,808 400,000 (11,000) Payment of cash dividends $ 825,808 Net cash provided by financing activities Summary ($ 50,318) Net decrease in cash 57,600 Cash at beginning of year $ 7,282 Cash at end of year Income Statements TABLE IC 4.2 2015 2017E 2016 $3,432000 $7035,600 $6,034,000 Sales Cost of goods sold 5,875,992 5528,000 2.864,000 519.988 Other expenses 550.000 358,672 Total operating costs excluding depreciation and amortization 56,425,992 $ 609,608 116.960 $ 49264 s 6047,988 53,222,672 EBITDA 13,988) 209.328 Depreciation & amortization 116,960 (S 130.948)S 190428 T8900 EBIT Interest expense 70.008 136,012 43.828 EBT S 422.640 IS 266.960) S 146,600 (106,784) (S 160.176) Taxes (40%) Net income 169056 5 253,584 58,640 87,960 EPS $1014 ($ 1.602) S 0.110 S 0.880 S 0220 s 6.638 DPS S 0220 $ 7.809 Book value per share $ 4.926 Stock price Shares outstanding 5 12.17 $ 2.25 S 8.50 250,000 100.000 100,000 Tax rate 4000 % 4000% 40.00% Lease payments Sinking fund payments $40,000 $40,000 $40,000 0 Note: E indicates estimated. The 2017 data are forecasts The firm had sufficient taxable income in 2014 and 2015 to obtain its full tax refund in 2016 TABLE IC 4.3 Ratio Analysis Industry Average 2017E 2016 2015 Current 1.2 x 2.3x 2.7x Quick 0.4x 0.8x 1.0x Inventory turnover Days sales outstanding (DSO) 4.7x 4.8x 6.1x 38.2 374 32.0 Fixed assets turnover 6.4x 10.0x 70x Total assets turnover 2.1 x 23x 26x Debt-to-capital ratio 73.4% 44.1% 40.0% TIE -1.0x 4.3x 6.2x Operating margin Profit margin -2.2 % 5.5% 7.3% -2.79% 2.6% 35% Basic earning power ROA 19.1 % -4.6% 13.0% -5.6% 6.0% 9.1% ROE -32.5 % -4.2 % 13.3 % 18.2% ROIC 9.6% 14.5% Price/earnings Market/book Book value per share -1.4x 9.7x 14.2x 0.5x 1.3x 2.4x $4.93 $6.64 na. Note: E indicates estimated. The 2017 data are forecasts Calculation is based on a 365-day year