Unformatted text preview: Integrated Case 4-25 D’Leon Inc., Part II Financial Statement Analysis 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 2008 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 2007 and 2008 balance sheets and income statements, together with projections for 2009, are given in Tables IC 4-1 and IC 4-2. In addition, Table IC 4-3 gives the company’s 2007 and 2008 financial ratios, together with industry average data. The 2009 projected financial statement data represent Jamison’s and Campo’s best guess for 2009 results, assuming that some new financing is arranged to get the company “over the hump.” Jamison examined monthly data for 2008 (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. Provide clear explanations, not yes or no answers. Table IC 4-1. Balance Sheets 2009E 2008 2007 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 Notes payable 300,000 636,808 200,000 Accruals 408,000 489,600 136,000 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 Note: “E” indicates estimated. The 2009 data are forecasts. Table IC 4-2. Income Statements 2009E 2008 2007 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 $ 6,425,992 $ 6,047,988 $ 3,222,672 EBITDA $ 609,608 ($ 13,988) $ 209,328 Depreciation 116,960 116,960 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 ) a 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 $ 2.25 $ 8.50 Shares outstanding 250,000 100,000 100,000 Tax rate...
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Watkins felt that they had period products to the competition and that he could charge a premium price for their products to result In Increased sales, profits, and stock price. The results, however, were unsatisfactory. Sales were below and costs were above all initial projections. These results have raised questions about the expansion and also caused concern among the Board of Directors and the major shareholders about the future of the company. Part I of this report analyzes Dolmen’s financial statements from 2004 and 2005.
It describes some of the effects of the expansion on the financial of the company and mom of the problems that have arisen with their current financial position. Net operating profit decreased, but operating working capital and total operating capital have shown increases. Sales had a considerable increase, but net income decreased. Dolmen’s financial also indicated a decrease in cash flow due to the company spending more cash than they were taking In.
These changes are subsequently resulting In decreased stock prices and a deteriorating financial position which Is concerning both management and shareholders. Part II of this report discusses the ratio analysis of Dolmen’s financial statements. It begins by explaining the five major categories of financial ratios: Liquidity, Asset Management, Debt Management, Profitability, and Market Value. While most of the 2005 ratios have shown significant declines and are below Industry averages, the 2006 projections look promising for the company and are showing significant increases.
Part II continues with a discussion of some of the limitations of financial ratios as comparison tools and concludes with a brief discussion of Dolmen’s credit issues and a summary of the company’s 2006 projections. It Is recommended that Dillon Inc. Induct In-depth financial research and perform an extensive ratio analysis of their financial position before deciding to undergo any further expansions. Doing this could greatly help the managers in their decision- making and aide in determining the effects of any future expansions on the financial stability of the company.