Read the following case and answer ALL the questions below. (20 Marks) Please read the following case and answer the questions given at the end. (COMPULSORY) Case Study D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 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, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in Tables 1 and 2. In addition, Table 3 gives the company's 2017 and 2018 financial ratios, together with industry average data. The 2019 projected financial statement data represent Jamison's and Campo's best guess for 2019 results, assuming that some new financing is arranged to get the company "over the hump." Jamison examined monthly data for 2018 (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 look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, 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 D'Leon'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. 3 CODE: ACC 501 Questions a) Discuss the useful of ratios. Explain the five major categories of ratios. b) Calculate D'Leon's 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in 2017, in 2018, and as projected for 2019? 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 company's liquidity ratios? Explain your answer. Questions a) Discuss the useful of ratios. Explain the five major categories of ratios. b) Calculate D'Leon's 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in 2017, in 2018, and as projected for 2019? 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 company's liquidity ratios? Explain your answer. Table 1 Balance Sheets 2019E Balance Sheets 2018 2017 Assets Cash Accounts receivable Inventories Total current assets Gross fixed assets Less accumulated depreciation Net fixed assets Total assets Liabilities and Equity $ 85,632 $ 878,000 7,282 632,160 1,287,360 $ 57,600 351,200 715,200 1,716,480 $2,680,112 1,197,160 380,120 $ 817,040 $3,497,152 $1,926,802 1,202,950 263,160 $ 939,790 $2,866,592 $ 1,124,000 491,000 146,200 $ 344,800 $1,468,800 Accounts payable Accruals Notes payable Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities and equity Table 2: Income Statement Income Statements Sales Cost of goods sold Other expenses Total operating costs excluding depreciation and $ 436,800 408,000 300,000 $1,144,800 400,000 1,721,176 231,176 $1,952,352 $3,497,152 $ 524,160 489,600 636,808 $1,650,568 723,432 460,000 32,592 $ 492,592 $2,866,592 $ 145,600 136,000 200,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $ 1,468,800 4 CODE: ACC501 2019E $7,035,600 5,875,992 550,000 2018 $ 6,034,000 2017 $3,432,000 5,528,000 519,988 2,864,000 358,672 amortization EBITDA Depreciation and amortization EBIT Interest expense EBT Taxes (40%) Net income $6,425,992 $ 609,608 116,960 $ 492,648 70,008 $ 422,640 169,056 $ 253,584 $ 6,047,988 (S 13,988) 116,960 ($ 130,948) 136,012 ($ 266,960) (106,784)" ($ 160,176) $ 3,222,672 $ 209,328 18,900 $ 190,428 43,828 $ 146,600 58,640 $ 87,960 EPS $ 1.014 ($ 1.602) $ 0.880 DPS $ 0.220 $ 0.110 $ 0.220 Book value per share $ 7.809 $ 4.926 $ 6.638 Stock price $ 12.17 $ 2.25 $ 8.50 Shares outstanding 250,000 100,000 Tax rate 40.00% Lease payments $40,000 40.00% $ 40,000 Sinking fund payments 0 0 100,000 40.00% $ 40,000 0 Table 3 Ratio Analysis Ratio Analysis 2019E 2018 2017 Industry Average Current 1.2X 2.3X 2.7X Quick 0.4 0.8x 1.0X Inventory turnover 4.7x 4.8X 6.1X Days sales outstanding (DSO)" 38.2 37.4 32.0 Fixed assets turnover 6.4X 10.0x 7.0x Total assets turnover 2.1X 2.3X 2.6X Debt-to-capital ratio 73.4% 44.1% 40.0% TIE -1.0x 4.3X 6.2X Operating margin -2.2% 5.5% 7.3% Profit margin -2.7% 2.6% 3.5% Basic earning power -4.6% 13.0% 19.1% ROA -5.6% 6.0% 9.1% ROE -32.5% 13.3% 18.2% ROIC -4.2% 9.6% 14.5% Price/earnings -1.4X 9.7X 14.2X Market/book 0.5x 1.3X 2.4X Book value per share $4.93 $6.64 n.a.