1 8 BIS 1 10 *821* kur w e Depot Case HE 14 ws NO BO Problem Part 11: Knee Depot, a building supplies company, has been lagging the rest of the industry in its performance. So the board has brought in a new CEO, Milo T. Barnsworth to fix things. Since he had a strong financial background, the first item on his todo list was to develop a financial planning section to an overall strategic plan. Barnsworth began by comparing KD's financial ratios to the rest of the industry. Whenever he encountered a substandard ratio, he would meet with the manager responsible to develop a plan to fix it. You have been hired to help Barnsworth finish his analysis of the company so that he can start implementing solutions. To do so, you must answer the following questions based on the financial data provided: 1.Forecast the Balance Sheet and Income Statement for 2013. In this scenario (call it the Steady Scenario) operations are not changed in any way. What is the AFN? Calculate the following items: FCF, ROIC, EPS, DPS and ROE. Use the following assumptions: Operating ratios stay the same No additional long-term debt or equity is issued Interest rate on all debt is 10% Any additional funding will be acquired through a line of credit on the last day of the year (thus no interest for 2013) Dividends will grow by 15% Sales will grow by 15% Now assume that KD changes its operations such that it achieves industry averages for the following items: a. Operating costs / Sales b. Receivables / Sales c. Fixes Assets / Sales Here is the question for #6: Under this scenario (call it the Improved Scenario), what is the AFN, FCF, ROIC, EPS, DPS and ROE? I 5 Problem Part 11 Now assume that KD changes its operations such that it achieves industry averages for the following items: a. Operating costs / Sales b. Receivables/ Sales c. Fixes Assets / Sales Here is the question for #6: Under this scenario (call it the improved Scenario), what is the AFN, FCF, ROIC, EPS, DPS and ROE? Knee Depot Case Exhibit 1 - Financial Statements and Selected Ratios Balance Sheet 12/31/12 Assets 100 20 80 Cash and securities Accounts receivable 290 180 390 Inventories Liabilities & Equity Accounts pay. + accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity 520 700 700 Total current assets Net fixed assets 500 300 200 500 1200 1200 Total liab. & equity Total assets Income Statement 2012 2000 Sales Total operating costs EBIT 1900 100 60 Interest 40 EBT 16 Taxes (40%) 24 Net income 9 15 Dividends Add to retain earnings Shares outstanding 10 2.4 EPS 0.9 DPS Year-end stock price 24 Industry 2000 0.15 0.0274 0.5 Selected Ratios and Other Data, 2012 KD Sales, 2012 (50): 2000 Expected growth in sales: 0.15 Profit margin (M): 0.012 Assets/Sales (AO*/50): 0.6 Payout ratio (POR): 0.375 Equity multiplier (Assets/Equity): 2.4 Total liability/Total assets 0.583333 0.35 2.13 0.53 5.2 300 0.04 Times interest earned (EBIT/Interest): 1.666667 Increase in sales (AS = gso): 300 (Payables + Accruals)/Sales (L0*/SO): 0.05 Operating costs/Sales: 0.95 Cash/Sales: 0.01 Receivables/Sales: 0.145 Inventories/Sales: 0.195 Fixed assets/Sales: 0.25 0.93 0.01 0.11 0.15 0.23 Tax rate: 0.4 0.4 Interest rate on all debt: 0.1 0.095 10 12 Price/Earning (P/E): ROE (Net income/Common equity): 0.048 0.1164 1 8 BIS 1 10 *821* kur w e Depot Case HE 14 ws NO BO Problem Part 11: Knee Depot, a building supplies company, has been lagging the rest of the industry in its performance. So the board has brought in a new CEO, Milo T. Barnsworth to fix things. Since he had a strong financial background, the first item on his todo list was to develop a financial planning section to an overall strategic plan. Barnsworth began by comparing KD's financial ratios to the rest of the industry. Whenever he encountered a substandard ratio, he would meet with the manager responsible to develop a plan to fix it. You have been hired to help Barnsworth finish his analysis of the company so that he can start implementing solutions. To do so, you must answer the following questions based on the financial data provided: 1.Forecast the Balance Sheet and Income Statement for 2013. In this scenario (call it the Steady Scenario) operations are not changed in any way. What is the AFN? Calculate the following items: FCF, ROIC, EPS, DPS and ROE. Use the following assumptions: Operating ratios stay the same No additional long-term debt or equity is issued Interest rate on all debt is 10% Any additional funding will be acquired through a line of credit on the last day of the year (thus no interest for 2013) Dividends will grow by 15% Sales will grow by 15% Now assume that KD changes its operations such that it achieves industry averages for the following items: a. Operating costs / Sales b. Receivables / Sales c. Fixes Assets / Sales Here is the question for #6: Under this scenario (call it the Improved Scenario), what is the AFN, FCF, ROIC, EPS, DPS and ROE? I 5 Problem Part 11 Now assume that KD changes its operations such that it achieves industry averages for the following items: a. Operating costs / Sales b. Receivables/ Sales c. Fixes Assets / Sales Here is the question for #6: Under this scenario (call it the improved Scenario), what is the AFN, FCF, ROIC, EPS, DPS and ROE? Knee Depot Case Exhibit 1 - Financial Statements and Selected Ratios Balance Sheet 12/31/12 Assets 100 20 80 Cash and securities Accounts receivable 290 180 390 Inventories Liabilities & Equity Accounts pay. + accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity 520 700 700 Total current assets Net fixed assets 500 300 200 500 1200 1200 Total liab. & equity Total assets Income Statement 2012 2000 Sales Total operating costs EBIT 1900 100 60 Interest 40 EBT 16 Taxes (40%) 24 Net income 9 15 Dividends Add to retain earnings Shares outstanding 10 2.4 EPS 0.9 DPS Year-end stock price 24 Industry 2000 0.15 0.0274 0.5 Selected Ratios and Other Data, 2012 KD Sales, 2012 (50): 2000 Expected growth in sales: 0.15 Profit margin (M): 0.012 Assets/Sales (AO*/50): 0.6 Payout ratio (POR): 0.375 Equity multiplier (Assets/Equity): 2.4 Total liability/Total assets 0.583333 0.35 2.13 0.53 5.2 300 0.04 Times interest earned (EBIT/Interest): 1.666667 Increase in sales (AS = gso): 300 (Payables + Accruals)/Sales (L0*/SO): 0.05 Operating costs/Sales: 0.95 Cash/Sales: 0.01 Receivables/Sales: 0.145 Inventories/Sales: 0.195 Fixed assets/Sales: 0.25 0.93 0.01 0.11 0.15 0.23 Tax rate: 0.4 0.4 Interest rate on all debt: 0.1 0.095 10 12 Price/Earning (P/E): ROE (Net income/Common equity): 0.048 0.1164