Knee Depot, a building supplies company, has been lagging the rest of the industry in its performance. So the board has brought in a new CEO, Milo T. Barnsworth to fix things. Since he had a strong financial background, the first item on his todo list was to develop a financial planning section to an overall strategic plan. Barnsworth began by comparing KDs financial ratios to the rest of the industry. Whenever he encountered a substandard ratio, he would meet with the manager responsible to develop a plan to fix it. You have been hired to help Barnsworth finish his analysis of the company so that he can start implementing solutions. To do so, you must answer the following questions based on the financial data provided:

1. (5 points) Given the data provided in Exhibit 1, how well run is KD compared to it industry peers? What are its primary strengths and weaknesses? Be specific, using ratios in your answer. Be sure to also use the DuPont equation in your analysis.

2. (5 points) Use the AFN equation to estimate KDs required external capital for 2013 if the expected 15% growth rate takes place. Assume the 2012 ratios (listed in question 6) will stay the same.

3. (5 points) How would the following items impact AFN, holding everything else constant: capital intensity, growth rate, increase in A/P, profit margin, payout ratio.

4. (5 points) What is KDs internal growth rate (aka self-supporting growth rate)?

5. (12 Points) Forecast the Balance Sheet and Income Statement for 2013. In this scenario (call it the Steady Scenario) operations are not changed in any way. Calculate the following items: AFN, FCF, ROIC, EPS, DPS and ROE. Use the following assumptions: a. Operating ratios stay the same (use the ratios that appear in question 6). b. No additional long-term debt or equity is issued c. Interest rate on all debt is 10% d. Any additional funding will be acquired through a line of credit on the last day of the year (thus no interest for 2013) e. Dividends will grow by 15% f. Sales will grow by 15%

6. (12 points) Now assume that KD changes its operations such that it achieves industry averages for the following items: a. Operating costs / Sales b. Receivables / Sales c. Fixes Assets / Sales Here is the question for #6: Under this scenario (call it the Improved Scenario), what is the AFN, FCF, ROIC, EPS, DPS and ROE?

Selected Ratios & Other Data 2012
	Knee Depot	Industry
Sales, 2012 (S0)	2000.00	2000
Expected growth in sales	0.15	0.15
Profit margin (M)	0.012	0.0274
Assets/Sales (A0*/S0)	0.60	0.5
Payout ratio (POR)	0.375	0.35
Equity mulitplier (Assets/Equity)	2.40	2.13
Total liabilities/Total assets	0.5833333333	0.53
Times interest earned (EBIT/Interest)	1.666666667	5.2
Increase in sales (Change in S = gS0)	300.00	300
(Payables + Accruals)/Sales (L0*/S0)	0.05	0.04
Operating costs/Sales	0.95	0.93
Cash/Sales	0.01	0.01
Receivables/Sales	0.145	0.11
Inventories/Sales	0.195	0.15
Fixed assets/Sales	0.25	0.23
Tax rate	0.40	0.4
Interest rate on all debt	0.10	0.095
Price/Earning (P/E)	10	12
ROE (Net income/Common equity)	0.048	0.1164