Carter is a small regional food producer whose specialty is high-quality nut products sold in the snack foods market. The company decided in 2018 to undertake a major expansion and "go national" in competition with some major snack foods companies. The company believes that its products were of higher quality than its competitors and that this quality difference will enable it to charge a premium price which would lead to greatly increased sales, profits and stock price. The company double its plant capacity and undertaken a major marketing campaign in an attempt to "go national."Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2019, rather than the expected profit.As a result, its managers, directors, and investors are concerned about the firm's survival.

Joan Watson was brought in as assistant to John King, Johnson's chairman, who had the task of getting the company back into a sound financial position.Carter's 2018 and 2019 actual balance sheets and income statements, together with projections for 2020, are given in Tables 1 and 2.In addition, Table 3 gives the company's 2018 and 2019 financial ratios, together with industry average data.The 2020 projected financial statement data represent the company's best guess for 2020 results, assuming that some new financing is arranged to get the company "over the hump."

Watson examined monthly data for 2019 (not given in the case), and she detected an improving pattern during the year.Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data.Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently.In other words, the lags between spending money and deriving benefits were longer than Carter's managers had anticipated.For these reasons, the company see hope for the companyprovided it can survive in the short run.

Watson must create analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken.Your assignment is to help her answer the following questions.Provide clear explanations, not yes or no answers.

Table 1.

Balance Sheets

2020E20192018

Assets

Cash$85,632$7,282$ 57,600

Accounts receivable878,000632,160351,200

Inventories 1,716,480 1,287,360 715,200

Total current assets$2,680,112$1,926,802$1,124,000

Gross fixed assets1,197,1601,202,950491,000

Less accumulated depreciation380,120263,160146,200

Net fixed assets$817,040$939,790$ 344,800

Total assets $3,497,152$2,866,592$ 1,468,800

Liabilities and Equity

Accounts payable$436,800$524,160$ 145,600

Notes payable300,000636,808200,000

Accruals408,000489,600136,000

Total current liabilities$1,144,800$1,650,568$481,600

Long-term debt400,000723,432323,432

Common stock 1,721,176460,000460,000

Retained earnings231,17632,592 203,768

Total equity$1,952,352$492,592$663,768

Total liabilities and equity $3,497,152$2,866,592$ 1,468,800

Note:"E" indicates estimated.The 2020 data are forecasts.

Table 2.

Income Statements

2020E20192018

Sales$7,035,600$6,034,000$ 3,432,000

Cost of goods sold5,875,9925,528,000 2,864,000

Other expenses550,000519,988358,672

Total operating costs

excluding depreciation$6,425,992$6,047,988$ 3,222,672

EBITDA$609,608($ 13,988)$209,328

Depreciation116,960116,96018,900

EBIT$492,648($130,948)$190,428

Interest expense70,008136,012 43,828

EBT$422,640($266,960)$146,600

Taxes (40%)169,056(106,784) ^a58,640

Net income$ 253,584($ 160,176)$ 87,960

EPS$1.014($1.602)$0.880

DPS$0.220$0.110$ 0.220

Book value per share$7.809$4.926$6.638

Stock price$12.17$2.25$8.50

Shares outstanding250,000100,000 100,000

Tax rate40.00%40.00%40.00%

Lease payments 40,00040,00040,000

Sinking fund payments 000

Note: "E" indicates estimated.The 2020 data are forecasts.

^a The firm had sufficient taxable income in 2017 and 2018 to obtain its full tax refund in 2019.

Table 3.

Ratio Analysis

Industry

2020E 2019 2018Average

Current1.22.3 2.7

Quick0.40.8 1.0

Inventory turnover4.74.86.1

Days sales outstanding (DSO) ^a38.237.432.0

Fixed assets turnover6.410.07.0

Total assets turnover2.12.32.6

Debt ratio82.8%54.8% 50.0%

Times Interest Earned -1.04.36.2

Operating margin (EBIT)-2.2%5.6%7.3%

Net Profit margin-2.7%2.6%3.5%

ROA-5.6%6.0%9.1%

ROE-32.5%13.3% 18.2%

Gross Profit MarginN/A

Note:"E indicates estimated.The 2020 data are forecasts.

^a Calculation is based on a 365-day year.

TABLE 4.

Statement of Stockholders' Equity, 2019

Total

Common Stock RetainedStockholders'

SharesAmountEarningsEquity

Balances, 12/31/18100,000$460,000$203,768 $663,768

2019 Net Income(160,176)

Cash Dividends(11,000)

Addition (Subtraction)

to Retained Earnings(171,176) (171,176)

Balances, 12/31/19100,000$460,000$ 32,592$492,592

Table 5.Statement of Cash Flows, 2019

Operating Activities

Net income($ 160,176)

Depreciation and amortization116,960

Increase in accounts payable378,560

Increase in accruals353,600

Increase in accounts receivable(280,960)

Increase in inventories (572,160)

Net cash provided by operating activities($ 164,176)

Long-Term Investing Activities

Additions to property, plant, and equipment($ 711,950)

Net cash used in investing activities($711,950)

Financing Activities

Increase in notes payable$ 436,808

Increase in long-term debt400,000

Payment of cash dividends (11,000)

Net cash provided by financing activities$ 825,808

Summary

Net decrease in cash($ 50,318)

Cash at beginning of year 57,600

Cash at end of year$ 7,282

Answer the following questions:

1.Calculate the expected Free Cash Flows from an operating, or asset perspective for 2019 and 2020, and explain how the cash flows were utilized, and its impact on the expansion plan. How did the company finance its expansion programs?

2.What is the maximum growth rate the company can expand at without external financing? The company's dividends payout ratio is 25%.

3.What is the sustainable growth rate of the company? The company's dividends payout ratio is 25%.

4.Calculate the External Funds Needed (EFN) to finance the growth in 2020?

5.Investors would like to see the company sales grow at 25% in 2020. What would be the EFN required for this growth. Would you recommend a 25% sales growth? Why or why not?

6.Calculate all of the ratios listed in Table 3 for year 2020.

7.What is your assessment of the financial health of the company? What actions must be taken?