D’leon Inc., Part I

Andrew Castillo

Integrated Case

3-12

D’Leon Inc., Part I

A. What effect did the expansion have on sales, after-tax operating income, net working capital (NWC), and net income?

Answer: [S3-1 through S3-9 provide background information. Then show S3 10 through S3-13 here.] Sales increased by $2,602,000.

AT operating income08 = EBIT(1 – Tax rate)

= -$130,948(1 – 0.4)

= -$130,948(0.6)

= -$78,569.

AT operating income07 = $114,257.

NWC08 = –

= ($7,282 + $632,160 + $1,287,360) – ($524,160 + $489,600)

= $913,042.

NWC07 = ($57,600 + $351,200 + $715,200) – ($145,600 + $136,000)

= $842,400.

NWC = $913,042 – $842,400 = $70,642.

Net working capital increased by $70,642.

NI08 – NI07 = ($160,176) – $87,960 = ($248,136).

There was a big drop, -$248,136, in net income during 2008.

B. What effect did the company’s expansion have on its free cash flow?

Answer: FCF08 = EBIT(1 – T) – Net investment in operating capital

= (-$78,569) – ($1,852,832 – $1,187,200)

= (-$78,569) – $665,632 = ($744,201).

Free cash flow was -$744,201 in 2008.

C. 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 2008 balance sheet, do you think that D’Leon pays suppliers on time? Explain, including what problems might occur if suppliers are not paid in a timely manner.

Answer: D’Leon probably does not pay its suppliers on time judging from the fact that its accounts payables balance increased by 260% from the past year, while sales increased by only 76%. Company records would show if they paid suppliers on time. By not paying suppliers on time, D’Leon is straining its relationship with them. If D’Leon continues to be late, eventually suppliers will cut the company off and put it into bankruptcy.

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...