Hatfield Medical Supplies' stock price had been lagging its industry averages, so its board of

directors brought in a new CEO, Adam Lee. Lee asked for the company's long-run strategic plan;

when he learned that no formal plan existed, he decided to develop one himself. Lee had brought

in Rick Novak, a finance MBA who had been working for a consulting company, to replace the

old CFO, and he asked Rick to develop the financial planning section of the strategic plan. In his

previous job, Novak's primary task had been to help clients develop financial forecasts, and that

was one reason Lee hired him.

Novak began as he always did, by comparing Hatfield's financial ratios to the industry averages.

If any ratio was substandard, he discussed it with the responsible manager to see what could be

done to improve the situation. Figure MC-1 provides Hatfield's latest financial statements plus

some ratios and other data that Novak plans to use in his analysis. Notice that the figure is

extracted from an Excel spreadsheet. Novak learned back in his university days that, because of

interactions among variables, any realistic financial forecast must be based on a computer model.

(The model is available to your instructor on the textbook's Web site.) Of course, he is also

aware of the well-known computer axiomgarbage in, garbage out (GIGO). Novak therefore

plans to discuss the model's inputs carefully with Hatfield's operating managers, individually

and collectively in the company's financial planning conference.

Hatfield Medical Supplies (Millions of Dollars Except Per Share Data)

Balance Sheet, 12/31/2010

Income Statement, Year Ending 2010

Cash

$

20

Sales

$2,000

Accts. rec.

280

Op. costs (excl. depr.)

1,800

Inventories

400

Depreciation

50

Total CA

$

700

EBIT

$

150

Net fixed assets

500

Interest

40

Total assets

$1,200

Pretax earnings

$

110

Taxes (40%)

44

Accts. pay. & accruals

$

80

Net income

$

66

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

$6.60

Retained earnings

200

DPS

$2.00

Total common equ.

$620

Ending stock price

$52.80

Total liab. & equity

$1,200

Selected Additional Data for 2010

Hatfield

Industr

y

Hatfield

Industry

Op. costs/Sales

90.0%

88.0%

Total liability/Total assets

48.3%

36.7%

Depr./FA

10.0%

12.0%

Times interest earned

3.8

8.9

Cash/Sales

1.0%

1.0%

Return on assets (ROA)

5.5%

10.2%

Receivables/Sales

14.0%

11.0%

Profit margin (M)

3.30%

4.99%

Inventories/Sales

20.0%

15.0%

Sales/Assets

1.67

2.04

Fixed assets/Sales

25.0%

22.0%

Assets/Equity

1.94

1.56

Acc. pay. & accr. / Sales

4.0%

4.0%

Return on equity (ROE)

10.6%

16.1%

Tax rate

40.0%

40.0%

P/E ratio

8.0

16.0

ROIC

8.0%

12.5%

NOPAT/Sales

4.5%

5.6%

Total op. capital/Sales

56.0%

45.0%

a. Do you think Adam Lee should develop a strategic plan for the company? Why? What

are the central elements of such a plan? What is the role of finance in a strategic plan?

Yes, a strategic plan should be developed for the company. The goal of companies is to create

more wealth for the owners and for financial managers to make their company more valuable

and without well designed strategic and tactical plans in place it is impossible to do. The central