SECTION -C 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 prot. As a result, its managers, directors, and investors are concerned about the rm'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 nancial 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 nancial ratios, together with industry average data. The 2019 projected nancial statement data represent Jamison's and Campo's best guess for 2019 results, assuming that some new nancing 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 prot by December. Thus, the annual data look somewhat worse than nal monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales ofces to generate sales, and for the new manufacturing facilities to operate efciently. In other words, the lags between spending money and deriving benets were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the companyprovided 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 nancial health, and what actions should be taken. Your assignment is to help her answer the following questions. CODE: A C C 5 0 1 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 Balance Sheets 2019E 2018 2017 Assets Cash $ 85,632 $ 7,282 $ 57,600 Accounts receivable 878,000 632,160 351,200 Inventories 1,716,480 1,287,360 715,200 Total current assets $2,680,112 $1,926,802 $ 1,124,000 Gross fixed assets 1,197,160 1,202,950 491,000 Less accumulated depreciation 380,120 263,160 146,200 Net fixed assets $ 817,040 $ 939,790 $ 344,800 Total assets $3,497,152 $2,866,592 $ 1,468,800 Liabilities and Equity Accounts payable $ 436,800 $ 524,160 $ 145,600 Accruals 408,000 489,600 136,000 Notes payable 300,000 636,808 200,000 Total current liabilities $1,144,800 $1,650,568 $ 481,600 Long-term debt 400,000 723,432 323,432 Common stock 1,721,176 460,000 460,000 Retained earnings 231,176 32,592 203,768 Total equity $1,952,352 $ 492,592 $ 663,768 Total liabilities and equity $3,497,152 $2,866,592 $ 1,468,800 Table 2: Income Statement 4CODE: A C C 5 0 1 Income Statements 2019E 2018 2017 Sales $7,035,600 $ 6,034,000 $ 3,432,000 Cost of goods sold 5,875,992 5,528,000 2,864,000 Other expenses 550,000 519,988 358,672 Total operating costs excluding depreciation and amortization $6,425,992 $ 6,047,988 $ 3,222,672 EBITDA $ 609,608 ($ 13,988) 209,328 Depreciation and amortization 116,960 16,960 18.900 EBIT $ 492,648 $ 130,948) 190,428 Interest expense 70,008 136,012 43,828 EBT $ 422,640 ($ 266,960) $ 146,600 Taxes (40%) 169,056 (106,784) 58,640 Net income $ 253,584 $ 160,176) 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 $ : $ 8.50 Shares outstanding 250,000 100,000 100,000 Tax rate 40.00% 40.00% 40.00% Lease payments $40,000 $ 40,000 $ 40,000 Sinking fund payments 0CODE: A C C 5 0 1 Table 3 Ratio Analysis Ratio Analysis 2019E 2018 2017 Industry Average Current 1.2X 2.3X 2.7X Quick 0.4X 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. ***END OF QUESTION PAPER * * * 6