Please read the entire case and then only answer parts a, b, c. Only these three
ID: 2818797 • Letter: P
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Please read the entire case and then only answer parts a, b, c. Only these three parts are necessary, but please explain how you solved and show your work. Thank you!!
INTEGRATED CASE D'LEON INC., PART I FINANCIAL STATEMENTS AND TAXES Part 1 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 hay not been up to the forecasted level; costs have been higher than were projected; and a large loss occu 26 red in aot6 rather than the expected profit. As a result, its managers, directors, and investors are concerned abour the firm's survival. Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of company back into a sound financial position. D'Leon's 2015 and 2016 balance sheets and income together with projections for 2017, are given in Tables IC 4.1 and IC 4.2. In addition, Table IC 4.3 gives the 2015 and 2016 financial ratios, together with industry average data. The 2017 projected financial statement data getting the statements, represent Jamison's and Campo's best guess for 2017 results, assuming that some new financing is arranged to get the company "over the hump Jamison examined monthly data for 2016 (not given in the case), and she detected an improving pattern d the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be aking longer for the advertising program to get the message out, for the new sales offices to generate sales, and fo 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 hope for the company-provided it can survive in the short rur. uring must prepare an analysis of where the company is now, what it must do to regain its financial actions should be taken. Your assignment is to help her answer the following questions. Provide clear and what explanations, not yes or no answens a. Why are ratios useful? What are the five major categories of ratios? Calculate D'Leon's 2017 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in 2015, in 2016, and as projected for 2017? We often think of ratios as being useful (1) to managers to help run the business,(2) to bankers for credit analysis. and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the company's liquidity ratios? Explain your answer. Calculate the 2017 inventory turnover, days sales outstanding (DSO), fixed assets turmover, and total assets turnover. How does D'Leon's utilization of assets stack up against other firms in the industry? b. d. Calculate the 2017 debt-to-capital and times-interest-earned ratios. How does D'Leon compare with the industry with respect to financial leverage? What can you conclude from these ratios? Calculate the 2017 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC). What can you say about these ratios? Calculate the 2017 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? Use the DuPont equation to provide a summary and overview of D'Leon's financial condition as projected for 2017. What are the firm's major strengths and weaknesses? the following simplified 2017 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting how would that change "ripple through" the financial statements (shown in thousands below) and influence the stock price?Explanation / Answer
A) The 5 Types of Financial Ratios
Liquidity: These ratios demonstrate a company's ability to pay their debts and other liabilities.
Activity: These ratios demonstrate how efficiently the business operates. In other words, you can see how well the company uses its resources, such as assets available to generate sales
Leverage: These ratios demonstrate a company's ability to pay its long-term debt. Leverage ratios are also referred to as debt ratios, debt-to-equity ratios, and interest-coverage ratios.
Performance: Performance ratios tell investors about profit, which explains why they are frequently referred to as profitability ratios.
Valuation: Since valuation ratios rely on a company's current share price, they provide a picture of whether or not the penny stock makes a compelling investment at current levels.
Ratios help in determining the current financial position of the company and also help in understanding the company's performance in comparison to its peers
B) Current Ratio (2017) = 2680112 / 1144800 = 2.3x
Quick Ratio (2017) 2680112 - 1716480 / 1144800 = 0.8x
The current and quick ratio have improved indicating an improvement in the liquidity position of the company
Liquidity ratios will be useful to managers in assessing the company's liquidity position and also to its shareholders to determine if the company has sufficient amount of funds to pay its debt. Debt ratios may be more useful for bankers in determining the credit quality
C) Inventory turnover ratio = 7035600 / 1716480 = 4.0x
Days in sales outstanding = 878000 / 7035600 * 365 = 45.5
Fixed asset turnover = 7035600 / 817040 = 8.61x
total asset turnover = 7035600 / 3497152 = 2.01x
The company's fixed asset turnover is in line with its peers, however, the total assets turnover is slightly below the industry average.
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