Lecture003 IBF

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  • 7/28/2019 Lecture003 IBF

    1/20

    Jamil Ahmed

    Assistant Professor

  • 7/28/2019 Lecture003 IBF

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    Balance Sheet: Assets

    Cash

    A/R

    Inventories

    Total CA

    Gross FA

    Less: Dep.

    Net FA

    Total Assets

    3-2

    20087,282

    632,160

    1,287,3601,926,802

    1,202,950

    263,160

    939,790

    2,866,592

    200757,600

    351,200

    715,2001,124,000

    491,000

    146,200

    344,800

    1,468,800

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    Balance Sheet: Liabilities and

    Equity

    Accts payable

    Notes payable

    Accruals

    Total CL

    Long-term debt

    Common stock

    Retained earnings

    Total Equity

    Total L & E

    3-3

    2008

    524,160

    636,808

    489,6001,650,568

    723,432

    460,000

    32,592

    492,592

    2,866,592

    2007

    145,600

    200,000

    136,000481,600

    323,432

    460,000203,768

    663,768

    1,468,800

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    Income Statement

    3-4

    2008 2007

    Sales $6,034,000 $3,432,000COGS 5,528,000 2,864,000Other expenses 519,988 358,672

    Total oper.costs excl.deprec. & amort. $6,047,988 $3,222,672

    Depreciation and amortization 116,960 18,900EBIT ($ 130,948) $ 190,428

    Interest expense 136,012 43,828EBT ($ 266,960) $ 146,600Taxes (106,784) 58,640Net income ($ 160,176) $ 87,960

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    Other Data

    No. of shares

    EPSDPS

    Stock price

    Lease pmts

    3-5

    2008

    100,000

    -$1.602$0.11

    $2.25

    $40,000

    2007

    100,000

    $0.88$0.22

    $8.50

    $40,000

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    Statement of Stockholders

    Equity (2008)

    3-6

    TotalCommon Stock Retained Stockholders

    Shares Amount Earnings Equity

    Balances, 12/31/07 100,000 $460,000 $203,768 $663,768

    2008 Net income (160,176)Cash dividends (11,000)Addition (subtraction)

    to retained earnings (171,176)Balances, 12/31/08 100,000 $460,000 $ 32,592 $492,592

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    Statement of Cash Flows (2008)

    3-7

    Operating Activities

    Net income ($160,176)Depreciation and amortization 116,960Increase in accounts payable 378,560Increase in accruals 353,600Increase in accounts receivable (280,960)Increase in inventories (572,160)Net cash provided by operating activities ($164,176)

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    Statement of Cash Flows (2008)

    3-8

    Long-Term Investing Activities

    Additions to property, plant, & equipment ($ 711,950)Net cash used in investing activities ($ 711,950)

    Financing Activities

    Increase in notes payable $ 436,808Increase in long-term debt 400,000Payment of cash dividends (11,000)

    Net cash provided by financing activities $ 825,808Summary

    Net decrease in cash ($ 50,318)Cash at beginning of year 57,600Cash at end of year $ 7,282

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    Conclusions about DLeons Financial

    Condition from Its Statement of CFs

    Net cash from operations = -$164,176, mainly

    because of negative NI.

    The firm borrowed $825,808 to meet its cashrequirements.

    Even after borrowing, the cash account fell by

    $50,318.

    3-9

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    Did the expansion create additional

    after-tax operating income?

    AT operating income = EBIT(1Tax rate)

    AT operating income08 = -$130,948(10.4)= -$130,948(0.6)

    = -$78,569

    AT operating income07 = $114,257

    3-10

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    What effect did the expansion have on

    net working capital?

    NWC = Current assets(Payables + Accruals)

    NWC08 = ($7,282 + $632,160 + $1,287,360)($524,160 + $489,600)

    = $913,042

    NWC07 = $842,400

    3-11

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    Assessment of the Expansions Effect on

    Operations

    Sales

    AT oper. inc.

    NWC

    Net income

    3-12

    2008

    $6,034,000

    -78,569

    913,042

    -160,176

    2007

    $3,432,000

    114,257

    842,400

    87,960

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    What was the free cash flow (FCF) for

    2008?

    NWCesexpenditur

    Capital

    onamortizatiandDepr.

    T)EBIT(1FCF

    3-13

    FCF08 = [-$130,948(10.4) + $116,960]

    [($1,202,950$491,000) + $70,642]

    = -$744,201

    Is negative free cash flow always a bad sign?

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    Does DLeon pay its suppliers on time?

    Probably not.

    A/P increased 260%, over the past year, while

    sales increased by only 76%.

    If this continues, suppliers may cut off

    DLeons trade credit.

    3-14

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    Does it appear that DLeons sales price

    exceeds its cost per unit sold?

    NO, the negative after-tax operating income

    and decline in cash position shows that

    DLeon is spending more on its operations

    than it is taking in.

    3-15

    if i ff

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    What if DLeons sales manager decided to offer

    60-day credit terms to customers, rather than 30-

    day credit terms?

    If competitors match terms, and sales remainconstant...

    A/R would. Cash would.

    If competitors dont match, and sales double...

    Short-run: Inventory and fixed assets to meetincreased sales. A/R, Cash. Company may

    have to seek additional financing. Long-run: Collections increase and the companys

    cash position would improve.

    3-16

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    How did DLeon finance its

    expansion?

    DLeon financed its expansion with external

    capital.

    DLeon issued long-term debt which reduced

    its financial strength and flexibility.

    3-17

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    Would DLeon have required external capital if

    they had broken even in 2008 (Net income = 0)?

    YES, the company would still have to finance

    its increase in assets. Looking to the

    Statement of Cash Flows, we see that the firm

    made an investment of $711,950 in net fixedassets. Therefore, they would have needed to

    raise additional funds.

    3-18

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    What happens if DLeon depreciates fixed assets

    over 7 years (as opposed to the current 10 years)?

    3-19

    No effect on physicalassets.

    Fixed assets on the balancesheet would decline.

    Net income would decline.

    Tax payments woulddecline.

    Cash position wouldimprove.

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    Market Value Added (MVA) &

    Economic Value Added (EVA)

    MVA = Market Value of StockEquity

    EVA = EBIT (1-Tax%)(Operating Capital)