Bioject: Part 1 - Financing Growth William Bones, CFO of BioJect (BJ), was preparing for a meeting with his company's bank, set for the following week. At that meeting, Mr. Bones intended to request a five year loan to finance the growth in the business and the expansion of the company's warehouse facilities. The company's recent financial performance is noted in Worksheets 1 & 2. BioJect was a rapidly growing producer and distributer of insulin injection devices. The units were sold throughout the US, but sales were concentrated in the eastern US. Since production was located in Boston, there was usually sufficient inventory on hand to accommodate the large inventory purchases of the local hospitals and medical offices. These customers usually saw their orders filled within 24 hours. For the year ended in December, 2018, BioJect had sales of of about $23.5 million. Net income for that period was $1.19 million. During the previous three years, sales had grown at a compound annual rate of over 20%. This record was a reflection of BioJect's excellent service and competitive technological advantage, which resulted in high levels of customer satisfaction. In 2014, BJ has borrowed funds from Central Bank at a YTM of 11.5% to build a warehouse. The loan is being repaid in equal annual installments of $125,000. At the end of 2018, the balance due on the loan was $875,000. The forecast repayment amounts are noted in the Excel template. At the same time as the borrowings, a line of credit was established. BJ had yet to borrow any money under this arrangement. The company has a target debt ratio of 30% debt, 70% equity. Publicly traded peer firms have Yahoo! Betas of 1.55 and have average D/E ratios of .75. Current 20 year Treasury bond rates sit at 2.25 % and BJ estimates a 5.5% market risk premium is appropriate. BJ believes its debt cost would be 7.5% if it were to refinance today. National Growth BJ was forecasting expansion of sales in the MidWest and Western parts of the country. To accommodate the forecast growth, it was planning on investing $2.4m over the next 18 months, of which $2m will be spent in 2019 and the remaining amount in 2020. It was anticipated this investment would fulfill the company's need for facilities for several years. Construction of a new warehouse in the MidWest was expected to be completed in early 2020. BJ's accountant forecast total depreciation expense of $213,000 and $333,000 for 2019 and 202o, respectively. Management anticipates that inventories will be the same proportional relationship to sales that it had in 2018 despite dis ruptions due to adding the new plant. Operating margins were expected to be consistent with past experience and the temporary drop in inventory would not affect the cost of goods as a percentage of sales). The company expects a future effective tax rate of 35% due to recent changes in the tax law. Mr. Bones expected BJ's dividend payout to increase to 25% of net income in the foreseeable future. Mr. Bones was forecasting sales growth at 30 % in 2019 , but falling to 20% the following year (2020). He was concerned what that might mean for the level of bank financing needed and set about to forecast the income statement and balance sheet for the firm over the next two years. Unless otherwise noted, he was going to assume the most recent years' operating ratios would prevail in the future. He had a few questions he wanted to answer before going to the bank: How had BJ performed over the last few years? Was the Bank going to be happy with BJ's performance? How much external financing does Bioject need to grow at the forecast rate? What would happen if growth was only 20% in the next year but grew at the forecast rates in subsequent years?? Bioject: Part 2 - Valuation Suppose BJ believes it will reach maturity at the end of 2020. Thereafter, cash flow growth is expected to average 4% and COGS is expected to level off at 55% of sales; SG&A is estimated to be 22% of sales. With mature growth, CapX and depreciation of $350,000 is forecast in all years starting in 2021 and thereafter. Since growth will be at steady state, no additions to working capital are forecast beyond 2020. BJ believes all forecast cash is operational, and not surplus. How much is BJ worth as a firm given this forecast? They estimate their WACC at 9%. If BioJect has a 2,250 million shares of equity outstanding and plans to maintain a permanent debt level of $850,000 for purposes of valuation, what is the value of their equity on a per share basis? Wksht 1: Financial Statement Forecast-BioJet Inc. Note: Do not add any columns or rows. Questlon 1: What is your forecast of Bloject's external funds needed In 2019 and 2020? Shaw wark belaw and make sure to identify all key inputs/assumptions too develop your forecast You need only include a first pass forecast (ie no modeling of any financing feedback is needed) Input/Assumption Area: 2018 2019 2020 2021 2019 2020 2021 Sales growth n/a 30% 20% 4% External Funds Needed: COGS Solve for EFN below and use cell references SG&A to place the data at the top of the page. $213 $350 Do you think they can raise the funds to grow $213 $333 Deprediation x rate at the forecast rate? Do you think they will be able Note these #s are to show you what is to pay it back? Explain. Dividend payout rate (Div/NI) meant by using case information to populate Cash Place your answer in the blue box to the the input orea. Use the case information in the Accounts receivable worksheet Bloverview to populate the the rest of the needed numbers left Inventories Inventories/Sales Capital Expenditures (CapEx) Accts Payable 2,000 400 350 What happens to the EFN if growth is at the lower rate of 20% in the first year, with remaining years at forecast rates? How does that affect their external financing need? Accruals Actual Forecast For years ending 12/31 2018 2019 2020 2021 INCOME STATEMENT Net sales $23,505 Cost of sales 13,612 Gross profit 9,893 SG&A 7471 Depreciation Netinterest expense 213 94 Pre-tax operating Income 2,115 Income taxes 925 Net income $1,190 $240 Dividends Additions to Retained Eamings $950 BALANCE SHEET Assets Cash $706 Accounts receivable 3,652 Income taxes 925 Net income $1,190 Dividends $240 Additions to Retained Earnings $950 BALANCE SHEET Assets Cash $706 Accounts receivable 3,652 Inventories 2,190 Total current assets 6,548 Gross plant & equipment 4,163 6,563 6,913 6,163 Accumulated depreciation 1,728 1,941 2,274 2,624 Net plant & equipment 2,435 Total assets $8,983 LIABILITIES Current maturities of long-term debt $125 $125 $125 $125 Accounts payable 1,440 Accrued expenses 1,653 Total current liabilities 3,218 Long-term debt $750 $625 $500 875 Common stock 1,135 Retained earnings 3,880 Total shareholders' equity 5,015 Total liabilities $9,108 External Funds Needed: Bioject: Part 1 - Financing Growth William Bones, CFO of BioJect (BJ), was preparing for a meeting with his company's bank, set for the following week. At that meeting, Mr. Bones intended to request a five year loan to finance the growth in the business and the expansion of the company's warehouse facilities. The company's recent financial performance is noted in Worksheets 1 & 2. BioJect was a rapidly growing producer and distributer of insulin injection devices. The units were sold throughout the US, but sales were concentrated in the eastern US. Since production was located in Boston, there was usually sufficient inventory on hand to accommodate the large inventory purchases of the local hospitals and medical offices. These customers usually saw their orders filled within 24 hours. For the year ended in December, 2018, BioJect had sales of of about $23.5 million. Net income for that period was $1.19 million. During the previous three years, sales had grown at a compound annual rate of over 20%. This record was a reflection of BioJect's excellent service and competitive technological advantage, which resulted in high levels of customer satisfaction. In 2014, BJ has borrowed funds from Central Bank at a YTM of 11.5% to build a warehouse. The loan is being repaid in equal annual installments of $125,000. At the end of 2018, the balance due on the loan was $875,000. The forecast repayment amounts are noted in the Excel template. At the same time as the borrowings, a line of credit was established. BJ had yet to borrow any money under this arrangement. The company has a target debt ratio of 30% debt, 70% equity. Publicly traded peer firms have Yahoo! Betas of 1.55 and have average D/E ratios of .75. Current 20 year Treasury bond rates sit at 2.25 % and BJ estimates a 5.5% market risk premium is appropriate. BJ believes its debt cost would be 7.5% if it were to refinance today. National Growth BJ was forecasting expansion of sales in the MidWest and Western parts of the country. To accommodate the forecast growth, it was planning on investing $2.4m over the next 18 months, of which $2m will be spent in 2019 and the remaining amount in 2020. It was anticipated this investment would fulfill the company's need for facilities for several years. Construction of a new warehouse in the MidWest was expected to be completed in early 2020. BJ's accountant forecast total depreciation expense of $213,000 and $333,000 for 2019 and 202o, respectively. Management anticipates that inventories will be the same proportional relationship to sales that it had in 2018 despite dis ruptions due to adding the new plant. Operating margins were expected to be consistent with past experience and the temporary drop in inventory would not affect the cost of goods as a percentage of sales). The company expects a future effective tax rate of 35% due to recent changes in the tax law. Mr. Bones expected BJ's dividend payout to increase to 25% of net income in the foreseeable future. Mr. Bones was forecasting sales growth at 30 % in 2019 , but falling to 20% the following year (2020). He was concerned what that might mean for the level of bank financing needed and set about to forecast the income statement and balance sheet for the firm over the next two years. Unless otherwise noted, he was going to assume the most recent years' operating ratios would prevail in the future. He had a few questions he wanted to answer before going to the bank: How had BJ performed over the last few years? Was the Bank going to be happy with BJ's performance? How much external financing does Bioject need to grow at the forecast rate? What would happen if growth was only 20% in the next year but grew at the forecast rates in subsequent years?? Bioject: Part 2 - Valuation Suppose BJ believes it will reach maturity at the end of 2020. Thereafter, cash flow growth is expected to average 4% and COGS is expected to level off at 55% of sales; SG&A is estimated to be 22% of sales. With mature growth, CapX and depreciation of $350,000 is forecast in all years starting in 2021 and thereafter. Since growth will be at steady state, no additions to working capital are forecast beyond 2020. BJ believes all forecast cash is operational, and not surplus. How much is BJ worth as a firm given this forecast? They estimate their WACC at 9%. If BioJect has a 2,250 million shares of equity outstanding and plans to maintain a permanent debt level of $850,000 for purposes of valuation, what is the value of their equity on a per share basis? Wksht 1: Financial Statement Forecast-BioJet Inc. Note: Do not add any columns or rows. Questlon 1: What is your forecast of Bloject's external funds needed In 2019 and 2020? Shaw wark belaw and make sure to identify all key inputs/assumptions too develop your forecast You need only include a first pass forecast (ie no modeling of any financing feedback is needed) Input/Assumption Area: 2018 2019 2020 2021 2019 2020 2021 Sales growth n/a 30% 20% 4% External Funds Needed: COGS Solve for EFN below and use cell references SG&A to place the data at the top of the page. $213 $350 Do you think they can raise the funds to grow $213 $333 Deprediation x rate at the forecast rate? Do you think they will be able Note these #s are to show you what is to pay it back? Explain. Dividend payout rate (Div/NI) meant by using case information to populate Cash Place your answer in the blue box to the the input orea. Use the case information in the Accounts receivable worksheet Bloverview to populate the the rest of the needed numbers left Inventories Inventories/Sales Capital Expenditures (CapEx) Accts Payable 2,000 400 350 What happens to the EFN if growth is at the lower rate of 20% in the first year, with remaining years at forecast rates? How does that affect their external financing need? Accruals Actual Forecast For years ending 12/31 2018 2019 2020 2021 INCOME STATEMENT Net sales $23,505 Cost of sales 13,612 Gross profit 9,893 SG&A 7471 Depreciation Netinterest expense 213 94 Pre-tax operating Income 2,115 Income taxes 925 Net income $1,190 $240 Dividends Additions to Retained Eamings $950 BALANCE SHEET Assets Cash $706 Accounts receivable 3,652 Income taxes 925 Net income $1,190 Dividends $240 Additions to Retained Earnings $950 BALANCE SHEET Assets Cash $706 Accounts receivable 3,652 Inventories 2,190 Total current assets 6,548 Gross plant & equipment 4,163 6,563 6,913 6,163 Accumulated depreciation 1,728 1,941 2,274 2,624 Net plant & equipment 2,435 Total assets $8,983 LIABILITIES Current maturities of long-term debt $125 $125 $125 $125 Accounts payable 1,440 Accrued expenses 1,653 Total current liabilities 3,218 Long-term debt $750 $625 $500 875 Common stock 1,135 Retained earnings 3,880 Total shareholders' equity 5,015 Total liabilities $9,108 External Funds Needed