Integrated Case

3-16
D¡¦Leon Inc., Part I
Financial Statements and Taxes

Donna Jamison, a 2000 graduate of the University of Florida with 4 years of banking experience, was recently brought in as assistant to the chairman of the board of D¡¦Leon Inc., a small food producer that operates in north Florida and whose specialty is high-quality pecan and other nut products sold in the snack-foods market. D¡¦Leon¡¦s president, Al Watkins, decided in 2004 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 differential would enable it to charge a premium …show more content…
NI05 ¡V NI04 = ($160,176) ¡V $87,960 = ($248,136).
There was a big drop, -$248,136, in net income during 2005.
B. What effect did the company¡¦s expansion have on its net cash flow, operating cash flow, and free cash flow?
Answer: [Show S3-15 and S3-16 here.]
NCF05 = NI + Dep and amort = ($160,176) + $116,960 = ($43,216).
NCF04 = $87,960 + $18,900 = $106,860.
OCF05 = EBIT(1 ¡V T) + Dep and amort = (-$130,948)(0.6) + $116,960 = $38,391.
OCF04 = ($190,428)(0.6) + $18,900 = $133,157. FCF05 = NOPAT ¡V Net investment in operating capital = (-$78,569) ¡V ($1,852,832 ¡V $1,187,200) = (-$78,569) ¡V $665,632 = ($744,201).
NCF is negative in 2005, but it was positive in 2004. OCF is positive in 2005, but it decreased by over 70% from its 2004 level. Free cash flow was -$744,201 in 2005.
C. Looking at D¡¦Leon¡¦s stock price today, would you conclude that the expansion increased or decreased MVA?
Answer: [Show S3-17 through S3-19 here.] During the last year, stock price has decreased by over 73%, thus one would conclude that the expansion has decreased MVA.
D. D¡¦Leon purchases materials on 30-day terms, meaning that it is supposed to pay for purchases within 30 days of receipt. Judging from its 2005 balance sheet, do you think D¡¦Leon pays suppliers on time? Explain. If not, what problems might this lead to?
Answer: [Show S3-20 here.] D¡¦Leon probably does not pay its suppliers