Questions:

a. What did the expansion have on sales, net operating profit after taxes (NOPAT) net operating
working capital (NOWC), total investor-supplied operating capital, net income?

Sales
Sales
01
-Sales
00
=$6,034,000 $3,432,000

=$2,602,000
SALES INCREASED BY $2,602,000.

Net Operating Profit After Taxes (NOPAT)
NOPAT
01
= EBIT (1 - TAX RATE)
= (-$130,948)(0.6)
= ($78,569)
NOPAT
00
= $190,428(0.6)
= $114,257

ANOPAT = ($78,569) - $114,257 = ($192,826)

NOPAT DECREASED BY $192,826.

Net Operating Working Capital (NOWC)

NOWC
01
=
|
.
|

\
|
+
|
.
|

\
|
+ + ACCRUALS
PAYABLE
ACCOUNTS
S INVENTORIE
RECEIVABLE
ACCOUNTS
CASH
= ($7,282 + $632,160 + $1,287,360) - ($524,160 + $489,600)
= $913,042.

NOWC
00
= ($57,600 + $351,200 + $715,200) - ($145,600 + $136,000)
= $842,400.

ANOWC = $913,042 - $842,400 = $70,642.
NET OPERATING WORKING CAPITAL INCREASED BY $70,642.
Total Investor- Supplied Operating Capital
OC= NET OPERATING WORKING CAPITAL + NET PLANT AND EQUIPMENT
OC
01
= $913,042 + $939,790 = $1,852,832.

OC
00
= $842,400 + $344,800 = $1,187,200.
AOC = $1,852,832 - $1,187,200 = $665,632.

TOTAL INVESTOR-SUPPLIED OPERATING CAPITAL INCREASED SUBSTANTIALLY BY $665,632
FROM 2000 TO 2001.

Net Income
NI
01
NI
00
= ($160,176) - $87,960
= ($248,136).
THERE WAS A BIG DROP, -$248,136, IN NET INCOME DURING 2001.

b. What effect did the companys expansion have on its net cash flow, operating cash flows and
free cash flow?

Net Cash Flow
NCF = NI + DEP AND AMORT
NCF
01
= ($160,176) + $116,960 = ($43,216).
NCF
00
= $87,960 + $18,900 = $106,860.
NCF IS NEGATIVE IN 2001, BUT IT WAS POSITIVE IN 2000.

Operating Cash Flow
OCF = EBIT(1 - T) + DEP AND AMORT
OFC
01
= (-$130,948)(0.6) + $116,960
= $38,391.
OCF
00
= ($190,428)(0.6) + $18,900 = $133,157.
OCF IS POSITIVE IN 2001, BUT IT DECREASED BY OVER 70 PERCENT FROM ITS 2000 LEVEL.
Free Cash Flows
FCF
01
= NOPAT - NET INVESTMENT IN OPERATING CAPITAL
= (-$78,569) - ($1,852,832 - $1,187,200)
= (-$78,569) - $665,632
= ($744,201).
FREE CASH FLOW WAS -$744,201 IN 2001.

c. Jamison also has asked you to estimate DLeons EVA. She estimates that the after-tax cost of
capital was 10 percent in 2000 and 13 percent in 2001.
EVA= EBIT(1 - T) - AFTER-TAX COST OF OPERATING CAPITAL
EVA
01
= (-$130,948)(0.6) - ($1,852,832)(0.13)
= ($319,437)

EVA
00
= EBIT(1 - T) - AFTER-TAX COST OF OPERATING CAPITAL
= ($190,428)(0.6) - ($1,187,200)(0.10)
= ($4,463)
IN 2000, EVA WAS SLIGHTLY NEGATIVE; HOWEVER IN 2001 EVA WAS SIGNIFICANTLY
NEGATIVE.

d. Looking at DLeons stock price today, would you conclude that the expansion increased or
decreased MVA?


MVA= (Shares outstanding) (Stock price) - Total common equity.

MVA
01
= [100,000sh ($2.25)] -$460,000
= ($235,000)

MVA
00
= [100,000sh ($8.50)] - $460,000
= $390,000
DURING THE LAST YEAR, STOCK PRICE HAS DECREASED BY OVER 73 PERCENT,
THUS ONE WOULD CONCLUDE THAT THE EXPANSION HAS DECREASED MVA.
e. DLeons purchase materials on 30-day terms, meaning that it is supposed to pay for purchases
within 30 days of receipt. Judging from its 2001 balance sheet, do you think DLeon pays supplier
on time? Explain. If not, what problems might this lead to?

DLEON PROBABLY DOES NOT PAY ITS SUPPLIERS ON TIME JUDGING FROM THE FACT
THAT ITS ACCOUNTS PAYABLES BALANCE INCREASED BY 260 PERCENT FROM THE PAST YEAR,
WHILE SALES INCREASED BY ONLY 76 PERCENT. COMPANY RECORDS WOULD SHOW IF THEY
PAID SUPPLIERS ON TIME. BY NOT PAYING SUPPLIERS ON TIME, DLEON IS STRAINING ITS
RELATIONSHIP WITH THEM. IF DLEON CONTINUES TO BE LATE, EVENTUALLY SUPPLIERS WILL
CUT THE COMPANY OFF AND PUT IT INTO BANKRUPTCY.

f. DLeon spends money for labor, materials, and fixed assets (depreciation) to make products, and
still more money to sell those products. Then, it makes sales that results in receivables, which
eventually result in cash inflows. Does it appear that DLeons sales price exceed its costs per
unit sold? How does it affect the cash balance?
IT DOES NOT APPEAR THE DLEONS SALES PRICE EXCEEDS ITS COSTS PER UNIT SOLD
AS INDICATED IN THE INCOME STATEMENT. THE COMPANY IS SPENDING MORE CASH THAN IT
IS TAKING IN AND, AS A RESULT, THE CASH ACCOUNT BALANCE HAS DECREASED.