A 1 03 Case model 2 3 B C D E F G H Chapter 3. Financial Statements, Cash Flow, and Taxes This spreadsheet model is designed to be used in conjunction with the chapter's integrated case and the 4 related PowerPoint slide presentation. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 EXHIBITS: INPUT DATA (for D'Leon) Table IC3.1 Balance Sheets 2015 Assets Cash Accounts receivable Inventories Total current assets Gross fixed assets Less: accumulated depreciation Net fixed assets Total assets Liabilities and equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Total debt Common stock (100,000 shares) Retained earnings Total common equity Total liabilities and equity $ $ $ $ $ $ $ $ $ 2014 7,282 632,160 1,287,360 1,926,802 1,202,950 263,160 939,790 2,866,592 $ 57,600 351,200 715,200 $1,124,000 491,000 146,200 $ 344,800 $1,468,800 524,160 636,808 489,600 1,650,568 723,432 2,374,000 460,000 32,592 492,592 2,866,592 $ 145,600 200,000 136,000 $ 481,600 323,432 $ 805,032 460,000 203,768 $ 663,768 $1,468,800 I J A 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 B C D E F Table IC3.2 Income Statements G 2015 Sales Cost of goods sold Other expenses Total operating exp. excl. depreciation and amortization Depreciation and amortization Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Taxes (40%) Net income $ EPS DPS Book value per share Stock price Shares outstanding Tax rate Lease payments Sinking fund payments $ $ $ $ $ $ $ $ 6,034,000 5,528,000 519,988 6,047,988 116,960 (130,948) 136,012 (266,960) (106,784) (160,176) (1.602) $0.11 4.926 2.25 100,000 40.00% 40,000 0 H 2014 $3,432,000 2,864,000 358,672 $3,222,672 18,900 $ 190,428 43,828 $ 146,600 58,640 $ 87,960 $ 0.880 $0.22 $ 6.638 $ 8.50 100,000 40.00% $ 40,000 0 Table IC3.3 Statement of Stockholders' Equity, 2015 56 57 58 Balances, Dec. 31, 2014 59 Add: Net Income, 2015 60 Less: Dividends to common stockholders 61 Addition (Subtraction) to Retained Earnings 62 Balances, Dec. 31, 2015 63 Common Stock Shares 100,000 $ Amount 460,000 100,000 $ 460,000 Total Retained Stockholders' Earnings Equity $ 203,768 $ 663,768 (160,176) (11,000) (171,176) $ 32,592 $ 492,592 I J A 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 B C D E F G H I J Table IC3.4 Statement of Cash Flows, 2015 Operating Activities Net Income Additions (Sources of Cash) Depreciation and amortization +change in accounts payable + change in accruals Subtractions (Uses of Cash) - change in accounts receivable -change in inventories Net cash provided by operating activities Long-Term Investing Activities - Additions to property, plant, and equipment Net cash used in investing activities Financing Activities + change in notes payable + change in long-term debt - Payment of cash dividends Net cash provided by financing activities Summary Net change in cash Cash at beginning of the year Cash at end of the year It is the change, not the level itself Negative for Use of Cash =-change of AR=-(AR15-AR14) Negative for Use of Cash =-change of IN=-(IN15-IN14) CapEx=Net Fixed Assets 15-Net Fixed Assets 14+ Deprecation 15, because K 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 L M N O P K 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 L M N O P K L M N O P 64 65 66 67 68 69 70 71 72 73 74 75 76 77 eprecation 15, 78 because: Net Fixed Assets 15=Net Fixed Assets 14-Deprecation15+CapEx 79 80 81 82 83 84 85 86 87 88 89 90 91 3-14 FREE CASH FLOW Bailey Corporation's financial statements (dollars and shares are in millions) are provided here. Balance Sheets as of December 31 2015 2014 Assets Cash and equivalents Accounts receivable Inventories Total current assets Net plant and equipment Total assets $ 14,000 30,000 28,125 $ 72,125 50,000 $122,125 $ 13,000 25,000 21,000 $ 59,000 47,000 $106,000 Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long-term bonds Total liabilities Common stock (5,000 shares) Retained earnings Common equity Total liabilities and equity $ 10,800 7,600 6,700 $ 25,100 15,000 $ 40,100 50,000 32,025 $ 82,025 $122,125 $ 9,000 6,000 5,150 $ 20,150 15,000 $ 35,150 50,000 20,850 $ 70,850 $ 106,000 Interest EBT Income Statement for Year Ending December 31, 2015 Sales $214,000 Operating costs excluding depreciation and amortization 170,000 EBITDA $ 44,000 Depreciation & amortization 5,000 EBIT $ 39,000 1,750 $ 37,250 Taxes (40%) 14,900 Net income $ 22,350 Dividends paid $ 11,175 What was net operating working capital for 2014 and 2015? b. What was Bailey's 2015 free cash flow? Construct Bailey's 2015 statement of stockholders' equity. d. What was Bailey's 2015 EVA? Assume that its after-tax cost of capital is 10%. What was Bailey's MVA at year-end 2015? Assume that its stock price at December 31, 2015 was $20. a C. e. 3-15 INCOME STATEMENT Hermann Industries is foresti CITRIC ACID. G PROTECT FLAVOR). INS PHYLLINE Part 2 Fundamental Concepts in Financial Management 96 Statement of Stockholders' Equity, 2015 TABLE IC 3.3 Common Stock Retained Earnings Total Stockholders' Equity Shares Amount Use cha $ 663,768 $460,000 100,000 $203,768 (160,176) (11,000) Balances, December 31, 2014 2015 Net Income Cash Dividends Addition (Subtraction) to Retained Earnings Balances, December 31, 2015 ΕΧΡΙ © Cengage Learning (171,176) $ 492,592 100,000 $460,000 $ 32,592 Ove land Colu TABLE IC 3.4 Statement of Cash Flows, 2015 finar you (Pro (Hea ($ 160,176) 116,960 perfc and Operating Activities Net income Depreciation and amortization Increase in accounts payable Increase in accruals Increase in accounts receivable Increase in inventories Net cash provided by operating activities can stror 378,560 353,600 (280,960) (572,160) ($ 164,176) balas avail Long-Term Investing Activities Additions to property, plant, and equipment Net cash used in investing activities ($ 711,950) Disc ($ 711,950) 1. L p C $ 436,808 Financing Activities Increase in notes payable Increase in long-term debt Payment of cash dividends Net cash provided by financing activities 2. I 3. L. 400,000 (11,000) $ 825,808 la 4. L у 5. C © Cengage Learning Summary Net decrease in cash Cash at beginning of year Cash at end of year е. s ($ 50,318) 57,600 $ 7,282 94 Part 2 Fundamel INTEGRATED CASE D'LEON INC., PARTI 3-20 stock price. Financial Statements and Taxes Donna Jamison, a 2010 graduate of the University of Florida, with 4 years of banking experience, was recently brought in as assistant to the chairperson 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 2014 to undertake a major expansion and to "go national” in competition with Frito-Lay, Eagle, and other major snack foods companies. Watkins believed that D’Leon's products were of higher quality than the competition's; that this quality differential would enable it to charge a premium price; and that the end result would be greatly increased sales, profits, and The company doubled its plant capacity, opened new sales offices outside its home territory, and launched an expensive advertising campaign. D'Leon's results were not satisfactory, to put it mildly. Its board of directors, which consisted of its president, vice president, and major stockholders (all of whom were local businesspeople), was most upset when directors learned how the expansion was going. Unhappy suppliers were being paid late; and the bank was complaining about the deteriorating situation and threatening to cut off credit. As a result, Watkins was informed that changes would have to be made-and quickly; otherwise, he would be fired. Also, at the board's insistence, Donna Jamison was brought in and given the job of assistant to Fred Campo, a retired banker who was D'Leon's chairperson and largest stockholder. Campo agreed to give up a few of his golfing days and help nurse the company back to health, with Jamison's help. Jamison began by gathering the financial statements and other data given in Tables IC 3.1, IC 3.2, IC 3.3, and IC 3.4. Assume that you are Jamison's assistant. You must help her answer the following questions for Campo. (Note: We will continue with this case in Chapter 4, and you will feel more comfortable with the analysis there. But answering these questions will help prepare you for Chapter 4. Provide clear explanations.) a. C. What effect did the expansion have on sales, after-tax operating income, net operating working capital (NOWC), and net income? b. What effect did the company's expansion have on its free cash flow? 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 2015 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. 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 result in receivables, which eventually result in cash inflows. Does it appear that D’Leon's sales price exceeds its costs per unit sold? How does this affect the cash balance? Suppose D'Leon's sales manager told the sales staff to start offering 60-day credit terms rather than the 30- day terms now being offered. D'Leon's competitors react by offering similar terms, so sales remain constant. What effect would this have on the cash account? How would the cash account be affected if sales doubled as a result of the credit policy change? f. Can you imagine a situation in which the sales price exceeds the cost of producing and selling a unit of output, yet a dramatic increase in sales volume causes the cash balance to decline? Explain. g. Did D’Leon finance its expansion program with internally generated funds (additions to retained earnings strength? plus depreciation) or with external capital? How does the choice of financing affect the company's financial e . to i. h. Refer to Tables IC 3.2 and IC 3.4. Suppose D'Leon broke even in 2015 in the sense that sales revenues equaled total operating costs plus interest charges. Would the asset expansion have caused the company experience a cash shortage that required it to raise external capital? Explain. If D’Leon starts depreciating fixed assets over 7 years rather than 10 years , would that affect (1) the physical stock of assets, (2) the balance sheet account for fixed assets, (3) the company's reported net income, and (4) the company's cash position? Assume that the same depreciation method is used for stockholder reporting and for tax calculations and that the accounting change has no effect on assets' physical lives. j. Explain how earnings per share, dividends per share, and book value per share are calculated and what they mean. Why does the market price per share not equal the book value share? k. Explain briefly the tax treatment of (1) interest and dividends paid, (2) interest earned and dividends received, (3) capital gains, and (4) tax loss carry-backs and carry-forwards. How might each of these items affect D'Leon's taxes? per Chapter 3 Financial Statements, Cash Flow, and Taxes 95 Balance Sheets TABLEIC 3.1 2015 2014 Assets Cash Accounts receivable Inventories Total current assets Gross fixed assets Less accumulated depreciation Net fixed assets $ 7,282 632,160 1,287,360 $1,926,802 1,202,950 263,160 $ 939,790 $2,866,592 $ 57,600 351,200 715,200 $1,124,000 491,000 146,200 $ 344,800 $1,468,800 Total assets $ 524,160 489,600 636,808 $1,650,568 Liabilities and Equity Accounts payable Accruals Notes payable Total current liabilities Long-term debt Common stock (100,000 shares) Retained earnings Total equity Total liabilities and equity 723,432 $ 145,600 136,000 200,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $1,468,800 460,000 32,592 © Cengage Learning $ 492,592 $2,866,592 Income Statements TABLE IC 3.2 2015 2014 $3,432,000 2,864,000 Sales $6,034,000 Cost of goods sold 5,528,000 519,988 Other expenses Total operating costs excluding depreciation and amortization $6,047,988 Depreciation and amortization 116,960 EBIT ($ 130,948) Interest expense 136,012 ЕВТ ($ 266,960) Taxes (40%) (106,784) Net income ($ 160,176) 358,672 $3,222,672 18,900 $ 190,428 43,828 $ 146,600 58,640 $ 87,960 0.880 EPS $ $ $ 0.220 6.638 ($ 1.602) $ 0.110 $ 4.926 $ 2.25 100,000 40.00% $ 40,000 $ DPS Book value per share Stock price Shares outstanding Tax rate Lease payments Sinking fund payments 8.50 100,000 40.00% $ 40,000 Cengage Learning 0 0 'The firm had sufficient taxable income in 2013 and 2014 to obtain its full tax refund in 2015.
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