Chapter 12 Mini Case
Hatfield Medical Suppliess stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak, a finance MBA who had been working for a consulting company, to replace the old CFO, and Lee asked Ashley to develop the financial planning section of the strategic plan. In her previous job, Novaks primary task had been to help clients develop financial forecasts, and that was one reason Lee hired her.
Novak began as she always did, by comparing Hatfields financial ratios to the industry averages. If any ratio was substandard, she discussed it with the responsible manager to see what could be done to improve the situation. The following data shows Hatfields latest financial statements plus some ratios and other data that Novak plans to use in her analysis.
Hatfield Medical Supplies: Balance Sheet (Millions of Dollars), 12/31/2013				Hatfield Medical Supplies: Income Statement (Millions of Dollars Except per Share)
						2013
Cash		$20		Sales		$2,000.0
Accts. rec.		$280		Op. costs (excl. depr.)		$1,800.0
Inventories		$400		Depreciation		$50.0
Total CA		$700		EBIT		$150.0
Net fixed assets		$500		Interest		$40.0
Total assets		$1,200		Pretax earnings		$110.0
				Taxes (40%)		$44.0
Accts. pay. & accruals		$80		Net income		$66.0
Line of credit		$0
Total CL		$80		Dividends		$20.0
Long-term debt		$500		Add. to RE		$46.0
Total liabilities		$580		Common shares		10.0
Common stock		$420		EPS		$6.6
Retained earnings		$200		DPS		$2.0
Total common equ.		$620		Ending stock price		$52.80
Total liab. & equity		$1,200
Selected Ratios and Other Data, 2013
		Hatfield	Industry			Hatfield	Industry
Op. costs/Sales		90%	88%	Liabilities to assets ratio		48.3%	36.7%
Depr./FA		10%	12%	Times interest earned		3.8	8.9
Cash/Sales		1%	1%	Return on assets (ROA)		5.5%	10.2%
Receivables/Sales		14%	11%	Profit margin (M)		3.30%	4.99%
Inventories/Sales		20%	15%	Turnover ratio		1.67	2.04
Fixed assets/Sales		25%	22%	Equity multiplier		1.94	1.58
Acc. pay. & accr. / Sales		4%	4%	Return on equity (ROE)		10.6%	16.1%
Tax rate		40%	40%	P/E ratio		8.0	16.0
ROIC		8.0%	12.5%
Net operating profit margin		4.5%	5.6%
Total op. capital/Sales		56.0%	45.0%
Additional Data		2014
Exp. Saled growth rate		10%
Interest rate on LT debt		8%
Target WACC		9%
e. Use the following assumptions to answer the questions below: (1) Operating ratios remain unchanged. (2) Sales will grow by 10%, 8%, 5%, and 5% for the next four years. (3) The target weighted average cost of capital (WACC) is 9%. This is the No Change scenario because operations remain unchanged.
f. Continue with the same assumptions for the No Change scenario from the previous question, but now forecast the balance sheet and income statements for 2014 (but not for the following three 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 2014 financial statements, answer the following questions. This Case study is listed everywhere on Chegg but no expert has fully answered through question F, Please answer through F.