Download - Lecture003 IBF

7/28/2019 Lecture003 IBF

1/20

Jamil Ahmed

Assistant Professor


2/20

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


3/20

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


4/20

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


5/20

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


6/20

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


7/20

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)


8/20

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


9/20

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


10/20

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


11/20

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


12/20

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


13/20

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?


14/20

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


15/20

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


16/20

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


17/20

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


18/20

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


19/20

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.


20/20

Market Value Added (MVA) &

Economic Value Added (EVA)

MVA = Market Value of StockEquity

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