lecture003 ibf
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7/28/2019 Lecture003 IBF
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Jamil Ahmed
Assistant Professor
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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 ($164,176)
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Statement of Cash Flows (2008)
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Long-Term Investing Activities
Additions to property, plant, & equipment ($ 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)
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