Hatfield Medical Supplies's 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 also collectively in the company's financial planning conference.

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?

b. Given the data in Figure MC-1, how well run would you say Hatfield appears to be in

comparison with other firms in its industry? What are its primary strengths and weaknesses?

Be specific in your answer, and point to various ratios that support your position.

Also, use the Du Pont equation (see Chapter 3) as one part of your analysis.

c. Use the AFN equation to estimate Hatfield's required new external capital for 2011 if

the 15% expected growth takes place. Assume that the firm's 2010 ratios will remain the

same in 2011.

d. Define the term capital intensity. Explain how a decline in capital intensity would affect

the AFN,