D'LEON INC., PART IlFINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation ofD'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacityand undertaken a major marketing campaign in an attempt to "go national." Thus far, sales have not been upto the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather thanthe expected profit. As a result, its managers, directors, and investors are concerned about the firm's survivalDonna 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 IC 4.1 and IC 4.2. In addition, Table IC 4.3 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 hadturned 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 salesoffices 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 runJamison 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 questionsProvide clear explanations, not yes or no answers: G. Use the DuPont equation to provide a summary and overview of D'Leon's financial condition as projected for 2019. What are the firm's major strengths and weaknesses?- DuPont equation is ROE= ROA X Equity Multiplier=Profit margin x Total assets turnover x Equity Multiplier=Net Income/ Sales x Sales/Total Assets x Total Assets / Total Common EquityH. Use the following simplified 2019 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change "ripple through" the financial statements (shown in thousands below) and influence the stock price?Accounts receivable: $878Other Current Assets: 1,802Net Fixed Assets: 817Total Assets: $3,497 Current Liabilities: $845Debt: 700Equity: 1,952Liabilities Plus Equity: $3,497 TABLE IC 4.2TABLE IC 4.3Income StatementsSalesCost of goods soldOther expensesTotal operating costs excluding depreciation andamortizationEBITDADepreciation and amortizationEBITInterest expenseEBTTaxes (40%)Net incomeEPSDPSBook value per shareStock priceShares outstandingTax rateLease paymentsSinking fund paymentsRatio AnalysisCurrentQuickInventory turnoverDays sales outstanding (DSO)Fixed assets turnoverTotal assets turnoverDebt-to-capital ratioTIEOperating marginProfit marginBasic earning powerROAROEROICPrice/earningsMarket/book2019E$7,035,6005,875,992550,0002019E$6,425,992$ 609,608116,960$ 492,64870,008$ 422,640169,056$ 253,584$ 1.014$ 0.220$ 7.809$ 12.17250,00040.00%$40,000Note: E indicates estimated. The 2019 data are forecasts.The firm had sufficient taxable income in 2016 and 2017 to obtain its full tax refund in 2018.Book value per shareNote: E indicates estimated. The 2019 data are forecasts.Calculation is based on a 365-day year.20181.2X0.4X4.7X38.26.4X2.1X73.4%-1.0X-2.2%-2.7%-4.6%-5.6%-32.5%-4.2%-1.4X0.5X$4.9302018$ 6,034,0005,528,000519,988$ 6,047,988($ 13,988)116,960($ 130,948)136,012($ 266,960)(106,784)($ 160,176)($ 1.602)$ 0.110$ 4.926$ 2.25100,00040.00%$ 40,00020172.3X0.8X4.8X037.410.0X2.3X44.1%4.3X5.5%2.6%13.0%6.0%13.3%9.6%9.7X1.3X$6.642017$ 3,432,0002,864,000358,672$3,222,672$ 209,32818,900$ 190,42843,828$ 146,60058,64087,960$$ 0.880$ 0.220$6.638$ 8.50100,00040.00%$ 40,0000Industry Average2.7X1.0X6.1X32.07.0X2.6X40.0%6.2X7.3%3.5%19.1%9.1%18.2%14.5%14.2X2.4Xn.a. AssetsCashAccounts receivableInventoriesTotal current assetsGross fixed assetsLess accumulated depreciationNet fixed assetsTotal assetsLiabilities and EquityAccounts payableAccrualsNotes payableTotal current liabilitiesLong-term debtCommon stockRetained earningsTotal equityTotal liabilities and equity2019E$85,632878,0001,716,480$2,680,1121,197,160380,120$ 817,040$3,497,152$ 436,800408,000300,000$1,144,800400,0001,721,176231,176$1,952,352$3,497,152Note: E indicates estimated. The 2019 data are forecasts.2018$ 7,282632,1601,287,360$1,926,8021,202,950263,160$ 939,790$2,866,592$ 524,160489,600636,808$1,650,568723,432460,00032,592$ 492,592$2,866,592Balance Sheets$201757,600351,200715,200$ 1,124,000491,000146,200$ 344,800$ 1,468,800$ 145,600136,000200,000$ 481,600323,432460,000203,768$ 663,768$ 1,468,800TABLE IC 4.1

Question

D'LEON INC., PART IlFINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation ofD'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacityand undertaken a major marketing campaign in an attempt to &#34;go national.&#34; Thus far, sales have not been upto the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather thanthe expected profit. As a result, its managers, directors, and investors are concerned about the firm's survivalDonna 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 IC 4.1 and IC 4.2. In addition, Table IC 4.3 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 &#34;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 hadturned 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 salesoffices 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 runJamison 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 questionsProvide clear explanations, not yes or no answers: G. Use the DuPont equation to provide a summary and overview of D'Leon's financial condition as projected for 2019. What are the firm's major strengths and weaknesses?- DuPont equation is ROE= ROA X Equity Multiplier=Profit margin x Total assets turnover x Equity Multiplier=Net Income/ Sales x Sales/Total Assets x Total Assets / Total Common EquityH. Use the following simplified 2019 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change &#34;ripple through&#34; the financial statements (shown in thousands below) and influence the stock price?Accounts receivable: $878Other Current Assets: 1,802Net Fixed Assets: 817Total Assets: $3,497 Current Liabilities: $845Debt: 700Equity: 1,952Liabilities Plus Equity: $3,497 TABLE IC 4.2TABLE IC 4.3Income StatementsSalesCost of goods soldOther expensesTotal operating costs excluding depreciation andamortizationEBITDADepreciation and amortizationEBITInterest expenseEBTTaxes (40%)Net incomeEPSDPSBook value per shareStock priceShares outstandingTax rateLease paymentsSinking fund paymentsRatio AnalysisCurrentQuickInventory turnoverDays sales outstanding (DSO)Fixed assets turnoverTotal assets turnoverDebt-to-capital ratioTIEOperating marginProfit marginBasic earning powerROAROEROICPrice/earningsMarket/book2019E$7,035,6005,875,992550,0002019E$6,425,992$ 609,608116,960$ 492,64870,008$ 422,640169,056$ 253,584$ 1.014$ 0.220$ 7.809$ 12.17250,00040.00%$40,000Note: E indicates estimated. The 2019 data are forecasts.The firm had sufficient taxable income in 2016 and 2017 to obtain its full tax refund in 2018.Book value per shareNote: E indicates estimated. The 2019 data are forecasts.Calculation is based on a 365-day year.20181.2X0.4X4.7X38.26.4X2.1X73.4%-1.0X-2.2%-2.7%-4.6%-5.6%-32.5%-4.2%-1.4X0.5X$4.9302018$ 6,034,0005,528,000519,988$ 6,047,988($ 13,988)116,960($ 130,948)136,012($ 266,960)(106,784)($ 160,176)($ 1.602)$ 0.110$ 4.926$ 2.25100,00040.00%$ 40,00020172.3X0.8X4.8X037.410.0X2.3X44.1%4.3X5.5%2.6%13.0%6.0%13.3%9.6%9.7X1.3X$6.642017$ 3,432,0002,864,000358,672$3,222,672$ 209,32818,900$ 190,42843,828$ 146,60058,64087,960$$ 0.880$ 0.220$6.638$ 8.50100,00040.00%$ 40,0000Industry Average2.7X1.0X6.1X32.07.0X2.6X40.0%6.2X7.3%3.5%19.1%9.1%18.2%14.5%14.2X2.4Xn.a. AssetsCashAccounts receivableInventoriesTotal current assetsGross fixed assetsLess accumulated depreciationNet fixed assetsTotal assetsLiabilities and EquityAccounts payableAccrualsNotes payableTotal current liabilitiesLong-term debtCommon stockRetained earningsTotal equityTotal liabilities and equity2019E$85,632878,0001,716,480$2,680,1121,197,160380,120$ 817,040$3,497,152$ 436,800408,000300,000$1,144,800400,0001,721,176231,176$1,952,352$3,497,152Note: E indicates estimated. The 2019 data are forecasts.2018$ 7,282632,1601,287,360$1,926,8021,202,950263,160$ 939,790$2,866,592$ 524,160489,600636,808$1,650,568723,432460,00032,592$ 492,592$2,866,592Balance Sheets$201757,600351,200715,200$ 1,124,000491,000146,200$ 344,800$ 1,468,800$ 145,600136,000200,000$ 481,600323,432460,000203,768$ 663,768$ 1,468,800TABLE IC 4.1

Accepted Answer

ROE:

It represents the return made by the investors on the capital invested in the issuer's…