Hatfield Medical Supplys 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 Novak 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 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 show Hatfields latest financial statements plus some ratios and other data that Novak plans to use in her analysis.

Balance Sheet	12/31/2019		Income Statement	12/31/2019
Cash	$ 90		Sales	$ 9,000.9
Accounts receivable	$ 1,260		Operating Costs	$ 8,100.9
Inventories	$ 1,440		Depreciation	$ 360.0
Total Current Assets	$ 2,790		EBIT	$ 540.0
Net fixed assets	$ 3,600		Interest	$ 144.0
Total Assets	$ 6,390		Pre-tax earnings	$ 396.0
			Taxes (25%)	$ 99.00
Accounts payable & accruals	$ 1,620		Net Income	$ 297.00
Line of credit	$ -
Total Current Liabilities	$ 1,620		Additional Information
Long-term debt	$ 1,800		Dividends	$ 100
Total Liabilities	$ 3,420		Additions to RE	$ 197
Common stock	$ 2,100		Common shares	50
Retained earnings	$ 870		EPS	$ 5.94
Total common equity	$ 2,970		DPS	$ 2.00
Total Liabilities & Equity	$ 6,390		Ending stock price	$ 40.00
	Hatfield	Industry
(Op. costs)/Sales	90%	88%
Depr./FA	10%	12%
Cash/Sales	1%	1%
Receivables/Sales	14%	11%
Inventories/Sales	16%	15%
Fixed assets/Sales	40%	32%
(Acc. Pay. & accr.)/Sales	18%	12%
Tax rate	25%	25%
Target WACC	10%	11%
Interest rate on debt	8%	7%
Profit margin (M)	3.30%	5.60%
Return on assets (ROA)	4.60%	9.50%
Return on equity (ROE)	10.00%	15.10%
Sales/Assets	1.41	1.69
Asset/Equity	2.15	1.59
Debt/TA	28.20%	16.90%
(Total Liabilities)/(Total Assets)	53.50%	37.30%
Times interest earned	3.80	11.70
P/E ratio	6.70	16.00
OP ratio: NOPAT/Sales	4.50%	6.10%
CR ratio: (Total op. capital)/Sales	53.00%	47.00%
ROIC	8.50%	13.00%

Use the following assumptions to answer the following questions: (1) Operating ratios remain unchanged. (2) Sales will grow by 11.1%, 8%, 5%, and 5% for the next 4 years. (3) The target weighted average cost of capital (WACC) is 10%. This is the No Change scenario because operations remain unchanged.

• (1) For each of the next 4 years, forecast the following items: sales, cash, accounts receivable, inventories, net fixed assets, accounts payable and accruals, operating costs (excluding depreciation), depreciation, and earnings before interest and taxes (EBIT).
• (2) Using the previously forecasted items, calculate for each of the next 4 years the net operating profit after taxes (NOPAT), net operating working capital, total operating capital, free cash flow (FCF), annual growth rate in FCF, and return on invested capital. What does the forecasted free cash flow in the first year imply about the need for external financing? Compare the forecasted ROIC with the WACC. What does this imply about how well the company is performing?
• (3) Assume that FCF will continue to grow at the growth rate for the last year in the forecast horizon. (Hint: gL=5%.) What is the horizon value at 2023? What is the present value of the horizon value? What is the present value of the forecasted FCF? (Hint: Use the free cash flows for 2020 through 2023.) What is the current value of operations? Using information from the 2019 financial statements, what is the current estimated intrinsic stock price?