D’ Leon Inc., Case part I
Alexander J. Uribe
MGM 6620 Managerial Finances
Juan M. Ramirez
Polytechnic University of Puerto Rico
Abstract – Donna Jamison, a 1995 graduate of the University of Florida with four years of banking experience, was recently brought in as an assistance to the Chairman of the board of D’Leon Inc., a small food producer that operates in north Florida and whose specialty high-quality pecan and other nut product sold in the snack-food market. D’Leon’s president, Al Watkins, decided in 1999 to undertake a major expansion and to “go national” in competition with Frito-Lay, Eagle, and other major snack-food companies. Watkins felt that D’Leon’s products were of a higher quality than the competition’s, that this quality difference would enable it to charge a premium price, and that the end result would be greatly increased sales, profits, and stock price. The company doubles its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D’Leon results were not satisfactory. As a result, Watkins was informed that changes would have to be made, and quickly, or he would be fired. Also, at the board’s insistence Donna Jamison was brought in and given the job of assistance to Fred Campo, a retired banker who was D’Leon’s chairman and largest stockholder.
Assuming that we are Jamison’s assistances, and we must help her we will answer the following question for Campo.
a) What effect did the expansion have on sales, NOPAT, net operating working capital (NOWC), total operating capital, and net income?
Sales: The effect of the expansion on the sales is an increase of $2,602,000.
Sales = sales2005 – sales2004
Sales = $ 6,034,000 – $ 3,432,000
Sales = $ 2,602,000
NOPAT: The effect of the expansion on the NOPAT is a decrease of $192,826.
NOPAT = EBIT (1- tax rates)
NOPAT2005 = (-$130,948) * (1-0.4) = ($78,568.8)
NOPAT2005 ( ($78,569)
NOPAT2004 = ($190,428) * (1-0.4) = $114,256.5
NOPAT2004 ( $114,257
(NOPAT = NOPAT2005 - NOPAT2004
(NOPAT = (-78,569) - $114,257 = ($192,826)
NOWC: The effect of the expansion on the NOWC is an increase of $70,642.
NOWC = (cash and equivalents + accounts receivable + inventories) – (accounts payable + accurals)
NOWC2005 = ($7,282 + $632,160 + $1,287,360) - ($524,160 + $489,600)
NOWC 2005 = $913,042
NOWC 2004 = ($57,600 + $351,200 + $715,200) - ($145,600 + $136,000)
NOWC 2004 = $842,400
( NOWC = NOWC 2005 - NOWC 2004
(NOPAT = $913,042 - $842,400 = $70,642
Total operating capital (TOC): The effect of the expansion on the total operating capital is an increase of $665,632.
TOC = NOWC + Net fixed assets
TOC2005 = $913,042 + $939,790 = $1,852,832
TOC2004 = $842,400 + $344,800 = $1,187,200
( TOC = TOC 2005 - TOC 2004
( TOC = $1,852,832 - $1,187,200 = $665,632
Net income: The effect of the expansion on the net income is a decrease of $248,136.
Net income = Net income2005 - Net income2004
Net income = (-$160,176) – $87,960 =($248,136)
b) What effect did the company’s expansion have on its net cash flow, operating cash flow and free cash flow?
Net cash flow: The effect of the expansion on the net cash flow is positive in 2004 and negative on 2005.
Net cash flow= Net income + depreciation and amortization
Net cash flow2005 = (-$160,176) + $116,960 = ($43,216)
Net cash flow2004 = $87,960 + $18,900 = $106,860
Operating cash flow (OCF): The effect of the expansion on the operating cash flow is positive in 2005 by decreased 71% from 2004.
OCF = NOPAT + depreciation and amortization
OCF2005 = (-$78,569) +$116,960= $38,391
OCF2004 = $114,257 + $18,900= $133,157
% of decrease = ($133,157 - $38,391) / $133,157 = 71.17%...
References:  Brigham, Eugene F. & Houston, Joel F. Integrated Case: D’Leon Inc., Part I. Fundamentals of Financial Management. 11 ed. Thomson South-Western, 2007. Pages 95-98
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