1) Recomendation

2) Analysis

Knee Depot Case Study

Executive Summary

* Current State of the company (2012) Vs Forecasted (2013)

* What assumptions have been made for analysis

* Analysis Results

* Recommendations

Assumptions

* Notes payable is the balance of the forecasted total current liabilities and the forecasted accounts payable

* Retained earnings is the balance of the total liabilities and common equity (assumed equal to total assets) and the sum of forecasted total liabilities and common stock (assumed constant)

Analysis

(5 points) Given the data provided in Exhibit 1, how well run is KD compared to it industry peers? What are its primary strengths and weaknesses? Be specific, using ratios in your answer. Be sure to also use the DuPont equation in your analysis.

(5 points) Use the AFN equation to estimate KDs required external capital for 2013 if the expected 15% growth rate takes place. Assume the 2012 ratios (listed in question 6) will stay the same.

FCF = EBIT (1-tax rate) (change in working capital)

FCF= 115 (1-0.40) (0)

FCF = 69

FCF = EBIT (1-tax rate) (change in working capital)

FCF= 161 (1-0.40) (16.7)

FCF = 79.9

(10 points) How would the following items impact AFN, holding everything else constant: capital intensity, growth rate, increase in A/P, profit margin, payout ratio.

(3 points) What is KDs internal growth rate (aka self-supporting growth rate)?

IGR = ROA * b / 1(ROA*b)

ROA = .02

b= Retention ratio (1-Dividend payout ratio) = 1 - .375 = .625

Dividend payout ratio = Dividends / Net Income = 9 / 24 = .375

IGR = .02*.625 /( 1-(.02*.625)) = 0.0125 / (1 - 0.0125) = 0.0125 / 0.9875 = 0.01265

IGR = 0.01265

(12 Points) 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 (use the ratios that appear in question 6).

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%

Please see Exhibit A for the Steady Scenario

FCF = 115 * (1-.4) - ((805 + 233) - (500 + 180)) = 115 * .6 - (1038 - 680) =

115 * .6 - 358 = 69 - 358 = -289

ROIC = (33 - 10.35) / 575 = 22.65 / 575 = .03939

EPS = 33 / 10 = 3.3

DPS = 10.35 / 10 = 1.035

ROE = 33 / 575 = .0574

AFN = (1380 - 1200) - (805 - 700) - (275 - 200) = 180 - 105 - 75 = 0

6. (15 points) Now assume that KD changes its operations such that it achieves industry averages for the following items:

Operating costs / Sales 2300 * .93 = 2,139

Receivables / Sales 2300 * .11 = 253

Fixes Assets / Sales 2300 * .23 = 529

Recommendations

Use the results from Question 6

Example:

Using industry average in replacement for those particular ratios,

Since forecasted operating costs were 2185 and using industry average was 2139, operating costs can go down by XX dollars

Exhibits And Tables

The written report (numbers 1 4 above) should be a maximum of five pages per case (12 point type). All quantitative analysis should be in the exhibits or tables (no limitation on number, but all should be referenced and used in the body of the report).

A. Steady Scenario

Forecast the Balance Sheet and Income Statement for 2013:

Income Statement 2013

Sales 2000 * 1.15 = 2,300

Total operating costs 2,300 * .95 = 2,185

EBIT 2,300 - 2,185 = 115

Interest 60

EBT 115 - 60 = 55

Taxes (40%) 55 * .40 = 22

Net income 33

Dividends 9 * 1.15 = 10.35

Add. to retain. earnings 33 - 10.35 = 22.65

Shares outstanding 10

EPS 33 / 10 = 3.3

DPS 10.35 / 10 = 1.035

Year-end stock price 24

Balance Sheet 2013

Assets

Cash and Securities 2300 * .01 = 23

Accounts Receivable 2300 * .145 = 333.50

Inventories 2300 * .195 = 448.50

Total Current Assets 805

Net Fixed Assets 2300 * .25 = 575

Total Assets 1380

Liabilities & Equity

Accounts pay. + Accruals 2300 * .05 = 115

Notes Payable 118

Total Current Liabilities 233

Long-term Debt 520 * 1.10 = 572

Total Liabilities 1380 * .583333 = 805

Common Stock 300

Retained Earnings 275

Total Common Equity 575

Total Liabilities & Equity 1380