Jamil Ahmed Assistant Professor

Balance Sheet: Assets

Cash
A/R Inventories Total CA Gross FA

Less: Dep.
Net FA

Total Assets

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

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Balance Sheet: Liabilities and Equity

Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings

Total Equity
Total L & E

2008 524,160 636,808 489,600 1,650,568 723,432 460,000 32,592 492,592 2,866,592

2007 145,600 200,000 136,000 481,600 323,432 460,000 203,768 663,768 1,468,800
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Income Statement
Sales COGS Other expenses Total oper.costs excl. deprec. & amort. Depreciation and amortization EBIT Interest expense EBT Taxes Net income 2008 $6,034,000 5,528,000 519,988 $6,047,988 116,960 ($ 130,948) 136,012 ($ 266,960) (106,784) ($ 160,176) 2007 $3,432,000 2,864,000 358,672 $3,222,672 18,900 $ 190,428 43,828 $ 146,600 58,640 $ 87,960
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Other Data
No. of shares EPS DPS Stock price Lease pmts
2008 100,000 -$1.602 $0.11 $2.25 $40,000 2007 100,000 $0.88 $0.22 $8.50 $40,000

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Statement of Stockholders Equity (2008)

Total Common Stock Retained Stockholders Shares Amount Earnings Equity 100,000 $460,000 $203,768 $663,768 (160,176) (11,000) 100,000 $460,000 $ 32,592 (171,176) $492,592

Balances, 12/31/07 2008 Net income Cash dividends Addition (subtraction) to retained earnings Balances, 12/31/08

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Statement of Cash Flows (2008)

Operating Activities Net income Depreciation and amortization Increase in accounts payable Increase in accruals Increase in accounts receivable Increase in inventories Net cash provided by operating activities ($160,176) 116,960 378,560 353,600 (280,960) (572,160) ($164,176)

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Statement of Cash Flows (2008)

Long-Term Investing Activities Additions to property, plant, & equipment Net cash used in investing activities Financing Activities Increase in notes payable Increase in long-term debt Payment of cash dividends Net cash provided by financing activities Summary Net decrease in cash Cash at beginning of year Cash at end of year ($ 711,950) ($ 711,950) $ 436,808 400,000 (11,000) $ 825,808 ($ 50,318) 57,600 $ 7,282
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Conclusions about DLeons Financial Condition from Its Statement of CFs

Net cash from operations = -$164,176, mainly because of negative NI. The firm borrowed $825,808 to meet its cash requirements. Even after borrowing, the cash account fell by $50,318.

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Did the expansion create additional after-tax operating income?

AT operating income = EBIT(1 Tax rate) AT operating income08 = -$130,948(1 0.4) = -$130,948(0.6) = -$78,569
AT operating income07 = $114,257
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What effect did the expansion have on net working capital?

NWC = Current assets (Payables + Accruals) NWC08 = ($7,282 + $632,160 + $1,287,360) ($524,160 + $489,600) = $913,042
= $842,400

NWC07

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Assessment of the Expansions Effect on Operations

2008 Sales AT oper. inc. NWC Net income $6,034,000 -78,569 2007 $3,432,000 114,257

913,042
-160,176

842,400
87,960

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What was the free cash flow (FCF) for 2008?

FCF EBIT(1 T) Depr. and amortization Capital expenditures NW C

FCF08

= [-$130,948(1 0.4) + $116,960] [($1,202,950 $491,000) + $70,642] = -$744,201

Is negative free cash flow always a bad sign?

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Does DLeon pay its suppliers on time?

Probably not.
A/P increased 260%, over the past year, while sales increased by only 76%. If this continues, suppliers may cut off DLeons trade credit.

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Does it appear that DLeons sales price exceeds its cost per unit sold?
NO, the negative after-tax operating income and decline in cash position shows that DLeon is spending more on its operations than it is taking in.

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What if DLeons sales manager decided to offer 60-day credit terms to customers, rather than 30day credit terms?

If competitors match terms, and sales remain constant...

A/R would . Cash would .

If competitors dont match, and sales double...

Short-run: Inventory and fixed assets to meet increased sales. A/R , Cash . Company may have to seek additional financing. Long-run: Collections increase and the companys cash position would improve.

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How did DLeon finance its expansion?

DLeon financed its expansion with external capital. DLeon issued long-term debt which reduced its financial strength and flexibility.

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Would DLeon have required external capital if they had broken even in 2008 (Net income = 0)?

YES, the company would still have to finance its increase in assets. Looking to the Statement of Cash Flows, we see that the firm made an investment of $711,950 in net fixed assets. Therefore, they would have needed to raise additional funds.

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What happens if DLeon depreciates fixed assets over 7 years (as opposed to the current 10 years)?

No effect on physical assets. Fixed assets on the balance sheet would decline. Net income would decline. Tax payments would decline. Cash position would improve.
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Market Value Added (MVA) & Economic Value Added (EVA)

MVA = Market Value of Stock Equity EVA = EBIT (1-Tax%) (Operating Capital)

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