ASSIGNMENT 2

ASSIGNMENT 2



ASSIGNMENT 2

Question A.

Note: Refer to the attached excel sheet for detailed computations

The sales increased by $2,602,000 from the previous year.

NOPAT11 = EBIT (1 - TAX RATE)

= (-$130,949) (0.60) = ($78,570).

NOPAT11 = $190,428(0.60) = $114,257

(NOPAT = ($78,570) - $114,258 = ($192,826)

The NOPAT figure shows a decrease by $192,826 from the previous year.

NOWC12 =

= ($7,283 + $632,161 + $1,287,360) - ($524,161 + $489,601)

= $913,042

NOWC11= ($57,600 + $351,200 + $715,200) - ($145,600 + $136,000)

= $842,400

(NOWC = $913,042 - $842,400 = $70,642.

Net Operating Working Capital is evident of an increase by $70,642 from the previous year.

OC12= NOWC + Net Plant and Equipment

= $913,045 + $939,790 = $1,852,832

OC11= $842,400 + $344,800 = $1,187,200

(OC = $1,852,833 - $1,187,200 = $665,632

The Total investor supplied operating capital shows substantial increase by $665,632 from the previous year i.e. 2011

NI12 - NI11 = ($160,175) - $87,960 = ($248,137).

The Net Income figure shows a significant decline from that of previous year.

Question B.

NCF12 = NI + D & A = ($160,176) + $116,960 = ($43,216).

NCF11 = $87,960 + $18,900 = $106,860.

OCF12 = EBIT (1 - T) + DEP AND AMORT = (-$130,948) (0.6) + $116,960 = $38,391.

OCF11 = ($190,428) (0.6) + $18,900 = $133,157.

FCF02 = NOPAT - NET INVESTMENT IN OPERATING CAPITAL

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

= (-$78,569) - $665,632 = ($744,201).

Net cash flow figure was positive in the previous year i.e. 2011 whereas, it is negative in 2012. On the other hand, the operating cash flow is positive in 2012 but is has shown 70 percent decline from that of previous year. The free cash flow as also negative (-$744,201) in the present year (2012).

Question C.

While referring to the accounts payable section of the financial statement, it is evident that the figure has increased by 260 percent from the previous year while sales figure was relatively stagnant with 76 percent increase. This implies that D'Leon does not pay its suppliers on time. If the company continues its practice, the suppliers might stop their supplies which will eventually strain its relationship and standing in the market, decline in production and thus sales, eventually leading to bankruptcy.

Question D.

The income statement of the company reveals that its sales price does not exceed its costs per unit sold. Yet, the company is spending more that its revenues and this income expenses gap has resulted in the negative cash position of the business.

Question E.

If D'Leon's sales manager offers an extension in the credit terms, it would certainly result in higher sales by a negative cash position. The business's cash position would further worsen and account receivable would pile up. This would further increase the probability of default and the business might have to spend more to recover cash. In addition to this, accounts payable would build up too because of slow collections. As a result of increased demand, sales would increase but it would demand higher inventory and possibly acquisition of fixed assets too to cope up with the sales demand. This would further increase the demand for cash ...