Integrated Case

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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

Assets
Cash Accounts receivable Inventories Total current assets Gross fixed assets Less accumulated depreciation Net fixed assets Total assets $

2009E 85,632 878,000 1,716,480 $ 2,680,112 1,197,160 380,120 $ 817,040 $ 3,497,152 $

2008 7,282 632,160 1,287,360 $ 1,926,802 1,202,950 263,160 $ 939,790 $ 2,866,592 $

2007 57,600 351,200 715,200 $ 1,124,000 491,000 146,200 $ 344,800 $ 1,468,800

Liabilities and Equity
Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities and equity $ 436,800 300,000 408,000 $ 1,144,800 400,000 1,721,176 231,176 $ 1,952,352 $ 3,497,152 $ 524,160 636,808 489,600 $ 1,650,568 723,432 460,000 32,592 $ 492,592 $ 2,866,592 $ 145,600 200,000 136,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $ 1,468,800

Note: “E” indicates estimated. The 2009 data are forecasts.

Table IC 4-2. Income Statements Sales Cost of goods sold Other expenses Total operating costs excluding depreciation EBITDA Depreciation EBIT Interest expense EBT Taxes (40%) Net income EPS DPS Book value per share Stock price Shares outstanding Tax rate Lease payments Sinking fund payments 2009E $ 7,035,600 5,875,992 550,000 $ 6,425,992 $ 609,608 116,960 $ 492,648 70,008 $ 422,640 169,056 $ 253,584 $ $ $ $ 1.014 0.220 7.809 12.17 250,000 40.00% 40,000 0 2008 $ 6,034,000 5,528,000 519,988 $ 6,047,988 ($ 13,988) 116,960 ($ 130,948) 136,012 ($ 266,960) (106,784)a ($ 160,176) ($ $ $ $ 1.602) 0.110 4.926 2.25 100,000 40.00% 40,000 0 2007 $ 3,432,000 2,864,000 358,672 $ 3,222,672 $ 209,328 18,900 $ 190,428 43,828 $ 146,600 58,640 $ 87,960 $ $ $ $ 0.880 0.220 6.638 8.50 100,000 40.00% 40,000 0

Note: “E” indicates estimated. The 2009 data are forecasts. a

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