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 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 Supply: Balance Sheet (Millions of Dollars), December 31				Hatfield Medical Supply: Income Statement (Millions of Dollars Except per Share)
		2016				2016
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, 2016
		Hatfield	Industry			Hatfield	Industry
(Op. costs)/Sales		90%	88%	(Total liabilities)/(Total assets)		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%	Sales/Assets		1.67	2.04
Fixed assets/Sales		25%	22%	Assets/Equity		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%
NOPAT/Sales		4.5%	5.6%
(Total op. capital)/Sales		56.0%	45.0%
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.
e. (1) For each of the next four years, forecast the following items: sales, cash, accounts receivable, inventories, net fixed assets, accounts payable & accruals, operating costs (excluding depreciation), depreciation, and earnings before interest and taxes (EBIT).
e. (2) Using the previously forecasted items, calculate for each of the next four 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 compare with the WACC. What does this imply about how well the company is performing?
e. (3) Assume that FCF will continue to grow at the growth rate for the last year in the forecast horizon (Hint: 5%). What is the horizon value at 2020? 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 2017 through 2020). What is the current value of operations? Using information from the 2016 financial statements, what is the current estimated intrinsic stock price?