D'leon Case

Question A) Effects of the expansion on sales, post-tax operating income, NOWC, and net income?

1. Sales increased by $2,602,000 ($6,034,000-$3,432,000 = $2,602,000)

2. Post-Tax Operating Income decreased significantly by $192,825.6.

A) Post-Tax operating income = EBIT(1 - Tax rate)

B) Post-Tax Operating income 2011 = -$130,948(1-.4) = -$130,948(.6) = -$78,568.8

C) Post-Tax Operating income 2010 = $190,428(1-.4) = $190,428(.6) = $114,256.8

D) -$78568.8-114,256.8=$192,825.6.

3. Net Operating Working Capital increased by $70,642

NOWC = Current Assets - (Total Current Liabilities-Notes Payable)

A) NOWC 2011 = ($7,282+$632,160+$1,287,360)-($524,160+$489,600) = $1,926,802-$1,013,760 = $913,042

B) NOWC 2010 = ($57,600+$351,200+$715,200)-($145,600+$136,000) = $1,124,000-$281, 600 = $842,400

C) NOWC change due to expansion = $913,042 - $842,400 = $70,642.

4. Net Income dropped by $248, 136 between 2010 & 2011

A) -$160, 176 - $87,960 = -$248,136

Question B) Effects of the expansion on free cash flow?

1. Free Cash Flow 2011= [EBIT(1-T)+Depreciation&Amortization]-(Capital expenditures + Change in NWOC from 2010 to 2011)

2. = [-130,948(1-.4)+116960]- [($711,950+$70,642)]

3. = (-$78,568.80+116,960) - ($782,592)

4. = ($38,391.2) - ($782,592)

5. Free cash flow was -$744,200.8 in 2011.

Question C) Does D'Leon pay suppliers on time?/What's wrong with not paying on time?

1. Based on the statement, I can assume that D'Leon does not pay its suppliers on time. The main factor in this assumption is the large increase in accounts payable from 2010 to 2011. 2010's accounts payable balance was $145,600. In 2011, this balance skyrocketed to $524,160, an increase of 260%. Sales from 2010 to 2011 only increased from $3,432,000 to $6,034,000, which is 75.8%. Company records would show if they paid suppliers on time. Not paying on time will negatively impact D'Leon's relationship with their suppliers, which can lead to bankruptcy if the suppliers cut them off eventually for continuous late payments.

Question D) D'Leon spends money for labor, materials, and fixed assets (depreciation) to make products and spends still more money to sell those products. Then the firm makes sales that result in receivables, which eventually result in cash inflows. Does it appear that D'Leon's sales price exceeds its costs per unit sold? How does this affect the cash balance?

1. No- As per the income statement, I can see that D'Leon's sales price does not exceed its costs.

2. The cash balance decreases since the company is spending more cash than it is bringing in.

Question E) Suppose D'Leon's sales manager told the sales staff to start offering 60-day credit terms rather than the 30-day terms now being offered. D'Leon's competitors react by offering similar terms, so sales remain constant. What effect would this have on the cash account? How would the cash account be affected if sales doubled as a result of the credit policy change?

1. If D'Leon extends its sales credit terms and sales remain constant, it will obviously take them longer to receive the funds owed to them. This would decrease the cash account and increase accounts receivable. Accounts payable would also increase because collections would take longer.

2. If sales double, inventory would need to increase to keep up with the sales. Fixed assets would likely need to increase as well. Accounts receivable will rise twice as fast and cash would decline quickly. Approximately 60 days later, collections will increase as a result of doubled sales, causing cash to eventually increase as well. To finance the expansion and extension of credit terms, D'Leon would likely need to borrow or sell stock at the beginning.

Question F) Can you imagine a situation in which the sales price exceeds the cost of producing and selling a unit of output, yet a dramatic increase in sales volume causes the cash balance to decline? Explain

1. This situation is likely to occur as suggested & described in the second part of the answer to the previous question.

Question G) Did D'Leon finance its expansion program with internally generated