FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of 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 IC 4.1 and 1C 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 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 tire 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 Irer answer the following questions. Provide clear explanations, not yes or no answers. a. Why are ratios useful? What are 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. c. Calculate the 2019 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does D'Leon's utilization of assets stack up against other firms in the industry? d. Calculate the 2019 debt-to-capital and times-interest-earned ratios. How does D’Leon compare with the industry with aspect to financial leverage? What can you conclude from these rations? e. Calculate the 2019 operating margin, profit margin, basic earning power (BET), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) What can you say about these ratios? f. Calculate the 2019 price/earnings ratio and market /book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? 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? h. 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 a ml 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? i. Does it appear that inventories could be adjusted? If so, how should that adjustment affect D'Leon's profitability and stock price? j. In 2018, the company paid its suppliers much later than the due dates; also, it was not maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut the company off, and its bank could 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 2019, D'Leon showed you its 2019 projections along with proof that it was going to raise more than $1.2 million of new equity? k. in hindsight. What should D'Leon have done in 2017? l. What are some potential problems and limitations of financial ratio analysis? m. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance? Note E indicated estimated. The 2019 date are forecasts. a Calculated is based on a 365-day year.

BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

Solutions

Chapter
Section
Chapter 4, Problem 26IC
Textbook Problem

FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of 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 IC 4.1 and 1C 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 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 tire 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 Irer answer the following questions. Provide clear explanations, not yes or no answers.

  1. a. Why are ratios useful? What are the five major categories of ratios?
  2. 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.
  3. c. Calculate the 2019 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. How does D'Leon's utilization of assets stack up against other firms in the industry?
  4. d. Calculate the 2019 debt-to-capital and times-interest-earned ratios. How does D’Leon compare with the industry with aspect to financial leverage? What can you conclude from these rations?
  5. e. Calculate the 2019 operating margin, profit margin, basic earning power (BET), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) What can you say about these ratios?
  6. f. Calculate the 2019 price/earnings ratio and market /book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
  7. 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?
  8. h. 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 a ml 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?

Chapter 4, Problem 26IC, FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation , example  1

  1. i. Does it appear that inventories could be adjusted? If so, how should that adjustment affect D'Leon's profitability and stock price?
  2. j. In 2018, the company paid its suppliers much later than the due dates; also, it was not maintaining financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut the company off, and its bank could 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 2019, D'Leon showed you its 2019 projections along with proof that it was going to raise more than $1.2 million of new equity?
  3. k. in hindsight. What should D'Leon have done in 2017?
  4. l. What are some potential problems and limitations of financial ratio analysis?
  5. m. What are some qualitative factors that analysts should consider when evaluating a company's likely future financial performance?

Chapter 4, Problem 26IC, FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation , example  2

Chapter 4, Problem 26IC, FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation , example  3

Note E indicated estimated. The 2019 date are forecasts.

a Calculated is based on a 365-day year.

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Chapter 4 Solutions

Fundamentals of Financial Management (MindTap Course List)
Ch. 4 - Financial ratio analysis is conducted by three...Ch. 4 - Why would the inventory turnover ratio be more...Ch. 4 - Over the past year, M.D. Ryngaert Co. had an...Ch. 4 - Profit margins and turnover ratios vary from one...Ch. 4 - How does inflation distort ratio analysis...Ch. 4 - If a firms ROE is low and management wants to...Ch. 4 - Give some examples that illustrate how (a)...Ch. 4 - Why is it sometimes misleading to compare a...Ch. 4 - Suppose you were comparing a discount merchandiser...Ch. 4 - Refer to an online finance source such as Yahoo!...Ch. 4 - Differentiate between ROE and ROIC.Ch. 4 - Indicate the effects of the transactions listed in...Ch. 4 - DAYS SALES OUTSTANDING Baxley Brothers has a DSO...Ch. 4 - DEBT TO CAPITAL RATIO Kayes Kitchenware has a...Ch. 4 - DuPONT ANALYSIS Hendersons Hardware has an ROA of...Ch. 4 - MARKET/BOOK AND EV/EBITDA RATIOS Edelman Engines...Ch. 4 - PRICE/EARNINGS RATIO A company has an EPS of 2.40,...Ch. 4 - DuPONT AND ROE A firm has a profit margin of 3%...Ch. 4 - ROE AND ROIC Baker Industriess net income is...Ch. 4 - DuPONT AND NET INCOME Precious Metal Mining has 17...Ch. 4 - BEP, ROE, AND ROIC Broward Manufacturing recently...Ch. 4 - M/B,SHARE PRICE, AND EV/EBITDA You are given the...Ch. 4 - RATIO CALCULATIONS Assume the following...Ch. 4 - RATIO CALCULATIONS Thomson Trucking has 16 billion...Ch. 4 - TIE AND ROIC RATIOS The W.C. Pruett Corp. has...Ch. 4 - RETURN ON EQUITY Pacific Packagings ROE last year...Ch. 4 - RETURN ON EQUITY AND QUICK RATIO Lloyd Inc. has...Ch. 4 - RETURN ON EQUITY Commonwealth Construction (CC)...Ch. 4 - CONCEPTUAL: RETURN ON EQUITY Which of the...Ch. 4 - TIE RATIO MPI Incorporated has 6 billion in...Ch. 4 - CURRENT RATIO The Stewart Company has 2,392,500 in...Ch. 4 - DSO AND ACCOUNTS RECEIVABLE Ingraham Inc....Ch. 4 - P/E AND STOCK PRICE Ferrell Inc. recently reported...Ch. 4 - BALANCE SHEET ANALYSIS Complete the balance sheet...Ch. 4 - RATIO ANALYSIS Data for Barry Computer Co. and its...Ch. 4 - Income Statement for Year Ended December 31, 2018...Ch. 4 - RATIO ANALYSIS The Corrigan Corporation's 2017 and...Ch. 4 - FINANCIAL STATEMENTS AND TAXES Part I of this...Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....Ch. 4 - Conducting a Financial Ratio Analysis on HP INC....

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