Balance Sheet12/31/2019Income Statement12/31/2019 Cash $90 Sales $9,000.9 Accounts receivable $1,260 Operating Costs $8,100.9 Inventories $1,440 Depreciation $360.0 Total Current Assets $2,790 EBIT $540.0 Net fixed assets $3,600 Interest $144.0 Total Assets $6,390 Pre-tax earnings $396.0 Taxes (25%) $99.00 Accounts payable & accruals $1,620 Net Income $297.00 Line of credit $- Total Current Liabilities $1,620 Additional Information Long-term debt $1,800 Dividends $100 Total Liabilities $3,420 Additions to RE $197 Common stock $2,100 Common shares 50 Retained earnings $870 EPS $5.94 Total common equity $2,970 DPS $2.00 Total Liabilities & Equity $6,390 Ending stock price $40.00 Hatfield Industry (Op. costs)/Sales 90% 88% Depr./FA 10% 12% Cash/Sales 1% 1% Receivables/Sales 14% 11% Inventories/Sales 16% 15% Fixed assets/Sales 40% 32% (Acc. Pay. & accr.)/Sales 18% 12% Tax rate 25% 25% Target WACC 10% 11% Interest rate on debt 8% 7% Profit margin (M) 3.30% 5.60% Return on assets (ROA) 4.60% 9.50% Return on equity (ROE) 10.00% 15.10% Sales/Assets 1.41 1.69 Asset/Equity 2.15 1.59 Debt/TA 28.20% 16.90% (Total Liabilities)/(Total Assets) 53.50% 37.30% Times interest earned 3.80 11.70 P/E ratio 6.70 16.00 OP ratio:NOPAT/Sales 4.50% 6.10% CR ratio:(Total op. capital)/Sales 53.00% 47.00% ROIC8.50%13.00%

1. Continue with the same assumptions for the No Change scenario from the previous question, but now forecast the balance sheet and income statements for 2020 (but not for the following 3 years) using the following preliminary financial policy. (1) Regular dividends will grow by 10%. (2) No additional long-term debt or common stock will be issued. (3) The interest rate on all debt is 8%. (4) Interest expense for long-term debt is based on the average balance during the year. (5) If the operating results and the preliminary financing plan cause a financing deficit, eliminate the deficit by drawing on a line of credit. The line of credit would be tapped on the last day of the year, so it would create no additional interest expenses for that year. (6) If there is a financing surplus, eliminate it by paying a special dividend. After forecasting the 2020 financial statements, answer the following questions.

• (1) How much will Hatfield need to draw on the line of credit?
• (2) What are some alternative ways than those in the preliminary financial policy that Hatfield might choose to eliminate the financing deficit?

1. Repeat the analysis performed in the previous question, but now assume that Hatfield is able to improve the following inputs: (1) Reduce operating costs (excluding depreciation) to sales to 89.4% at a cost of $40 million. (2) Reduce inventories/sales to 14% at a cost of $10 million. (3) Reduce net fixed assets/sales to 38% at a cost of $20 million. This is the Improve scenario.

• (1) Should Hatfield implement the improvement plan? How much value would it add to the company?
• (2) How much can Hatfield pay as a special dividend in the Improve scenario? What else might Hatfield do with the financing surplus?