26 FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, d

Question

26 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 ampaign 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 2014 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 back into a sound financial position. D'Leon's 2013 and 2014 balance sheets and income statements, together with projections for 2015, are given in Tables IC 4.1 and IC 4.2. In addition, Table IC 4.3 gives the compan 2013 and 2014 financial ratios, together with industry average data. The 2015 projected financial statement data represent Jamison's and Campo's best guess for 2015 results, assuming that some new financing is arranged to get the company "over the hump.

Explanation / Answer

h. If the company reduces its DSO, its reliance on short term debt (working capital debt) will decrease since it will be able to realize money faster.

Hence, the company will be required to pay low interest on debt (overall debt decreased). This will lead to increase in PAT and hence EPS will increase

32/365*7035600= 616820

Against 878000

Debt will decrease by 878000-616820= 261180

I. Inventory stock days

2013: (715200/2864000)*365= 91 days

2014: (1287360/5528000)*365= 85 days

2015E: (1716480/5875992)*365= 107 days

Yes, inventory days can be reduced in 2015 since there is a decreasing trend. 91 to 85

Similar to earlier point, debt will decrease and ………

J. Given that the company is making losses in 2014, as a supplier and banker I will be worried.

Operating loss is a bad sign for the company (EBITDA)

Yes, 2015 projections and equity infusion will give me a comfort (both as a banker and suppliers) as the company will have funds to pay its financial obligations

The company can completely repay long term debt of 0.4 m from 1.2 m of equity infusion and it can even pay its creditor

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