Fundamentals of Financial Manageme...

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



Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
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?


  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?



Note E indicated estimated. The 2019 date are forecasts.

a Calculated is based on a 365-day year.


Summary Introduction

To determine: The usefulness of ratios and the 5 main categories of ratios.

Ratio Analysis:

Ratios are used to compare two arithmetical figures. In case of the ratio analysis of the company, the financial ratios are calculated. The financial ratios examine the performance of the company and are used to compare with other business. It indicates relationship of two or more parts of the financial statements.


The uses of ratios are as follows:

  • Ratios help the manager to know the performance of the company and take necessary steps to improve the company’s performance.
  • Ratios help lenders in calculating the repayment of debts.
  • Ratios help stockholders in forecasting future dividends and earnings...


Summary Introduction

To determine: The current and quick ratio for the year 2019, the company liquidity potion for 2017, 2018, and 2019 and all the analysts have equal interest in company liquidity ratio.


Liquidity is a term used to define a company’s ability to repay its obligations on time. It is analyzed as a part of evaluation of that company. The lender and potential investors of a firm consider it before making decision related to a company.


Summary Introduction

To determine: The inventory turnover ratio, days sales outstanding ratio, fixed asset turnover ratio, and total assets turnover ratio for the year 2019.


Financial Ratio Analysis: Financial ratio analysis is one of the tools of financial analysis of a firm. It represents the relationship between two or more items of the financial statement.


Summary Introduction

To determine: The debt-to capital and times-interest-earned ratio, the manner in which Firm D compares the industry with respect to financial leverage and the conclusion from these ratios.


Summary Introduction

To determine: The operating margin, profit margin, basic earning power, return on assets, return on earnings, and return on invested capital and comment on these ratios.


Summary Introduction

To determine: The price/ earnings ratio and market/ book ratio for the year 2019. The investor’s opinion on these ratios.


Summary Introduction

To explain: The summary and overview of Company D financial condition using DuPont equation and the major weaknesses and strengths of the firm.


Summary Introduction

To explain: The manner in which improvement in days sales outstanding would affect the stock price.


Summary Introduction

To explain: The way inventories would be adjusted and the way these adjustments affect Company D stock price and profitability.


Summary Introduction

To explain: Whether as a credit manager Person X would countinue to extend the credit to Company with not maintaing proper financial ratios.


Summary Introduction

To explain: The measures that should have been taken by Company D in 2017.


Summary Introduction

To discuss: The limitations and potential problems in analyzing the financial ratios.


Summary Introduction

To discuss: The factors that must be considered by the analysts while evaluating the company.

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