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BIU abe X2 X? = = = Styless Idexo Corporation is a privately held designer and manufacturer of licensed college apparel in Cincinnati, Ohio. In late 2016, after several years of lackluster performance, the firm's owner and founder, Rebecca Ferris, returned from retirement to replace the current CEO, reinvigorate the firm, and plan for its eventual sale or possible IPO. She has hired you to assist with developing the firm's financial plan for the next five years. In 2016, Idexo had total assets of about $103 million and annual sales of $100 million (see Table 1). The firm was profitable, with expected 2016 earnings of more than $9 million, for a net profit margin of 9.1%. However, revenue growth has slowed dramatically in recent years and the firm's net profit margin has actually beek declining, Ferris is convinced the firm can do better. After only several weeks at the helm, she has already identified a number of potential improvements to drive the firm's future growth Year 2016 Table 1 Idexo's 2016 Income Statement and Balance Sheet 1 Year 2016 1 2 Income Statement ($000s) 2 Balance Sheet ($000s) 3 Sales 100,000 3 Assets 4 Cost of Goods Sold 4 Cash and Cash Equivalents S Raw Materials -21,3335 Accounts Receivable 6 Direct Labor Costs -24,000 6 Inventories 7 Gross Profit 54,6677 Total Current Assets 18 Sales and Marketing -15,000 8 Property, Plant, and Equipment Administration -18,000 9 Goodwill 10 EBITA 21,667 10 Total Assets 11 Depreciation -6,667 11 Liabilities and Stockholders' Equity 12 EBIT 15,000 12 Accounts Payable 13 Interest Expense (net) -1,021 13 Debt 14 Pretax Income 13,979 14 Total Liabilities 15 Income Tax -4,893 15 Stockholders' Equity 1692 words English (United States) Focus 15,000 20,000 8,219 43,219 60,000 103,219 6,205 20,000 26,205 77,014 A. A. Styles Styles Pane 60,000 103,219 BIU obe X, XA 8 Sales and Marketing 9 Administration 10 EBITA 11 Depreciation 12 EBIT 13 Interest Expense (net) 14 Pretax income 15 Income Tax 16 Net Income -15,000 -18,000 21,667 -6,667 15,000 - 1,021 13,979 -4,893 9,086 8 Property, Plant, and Equipment 9 Goodwill 10 Total Assets 11 Liabilities and Stockholders' Equity 12 Accounts Payable 13 Debt 14 Total Liabilities 15 Stockholders' Equity 16 Total Liabilities and Equity 6,205 20,000 26,205 77,014 103,219 1 Operational Improvements On the operational side, Ferris is quite optimistic regarding the company's prospects. The market is expected to grow by 6% per year, and Idexo produces a superior product. Idexo's market share has not grown in recent years because prior management devoted insufficient resources to product development, sales, and marketing. At the same time, Idexo has overspent on administrative costs. Indeed, from Table 1, Idexo's current administrative expenses are $18 Calibri (Body) 12 A A A Paste Styles Styles Pane 2020 2021 1.0% 25,250 14.0% B I U - obe X, XA Table 2 Idexo's Sales and Operating Cost Projections 1 Year 2016 2017 2018 2019 2 Sales Data Growth/Yr 3 Market Size (000s units) 6.0% 20,000 21,200 22,472 23,820 4 Market Share 10.0% 11.0% 12.0% 13.0% 5 Average Sales Price (S/unit) 2.0% 50.00 51.00 52.02 53.06 6 7 Operating Expense and Tax Data 8 Gross Margin 54.7% 53.0% 53.0% 53.0% 9 Sales and Marketing (% sales) 15.0% 16,5% 18.0% 19.5% 10 Administration (% sales) 1 18.0% 15.0% 15.0% 14.0% 11 Tax Rate 35.0% 35.0% 35.0% 35.0% *Market share growth is expected through 2020 only 26,765 14.0% 55.20 54,12 53.0% 20.096 13,096 35.0% 53.0 20.0% 13.00 35.09 Expansion Plans Table 3 shows the forecast for Idexo's capital expenditures over the next five years. Based on the estimates for capital expenditures and depreciation, this spreadsheet tracks the book value of Idexo's plant, property, and equipment starting from its level at the end of 2016. Note that Investment is expected to remain relatively low over the next two years--slightly below depreciation. Idexo will expand production during this period by using its existing plant more efficiently 2019 2020 2021 Table 3 Idexo's Capital Expenditure Forecast 1 Year 2016 2017 2018 2 Fixed Assets and Capital Investment (5000s) 3 Opening Book Value 60,167 60,000 58,500 4 Capital Investment 6,500 5,000 5,000 5 Depreciation -6,6676,500 -6,350 6 Closing Book Value 60,000 58,500 57.150 57,150 25,000 -8.215 73,935 73,935 12,000 -8,594 77 341 77,341 8.000 -8,534 76,807 Page 2 of 5 1692 words English (United States) Focus BIU obe X, XA Styles Styles Pane However, once Idexo's volume grows by more than 50% over its current level, the firm will need to undertake a major expansion to increase its manufacturing capacity. Based on the projections in Table 2, sales growth exceeds 50% of current sales in 2019. Therefore, Table 3 budgets for a major expansion of the plant at that time, leading to a large increase in capital expenditures in 2019 and 2020. Working Capital Management To compensate for its weak sales and marketing efforts, Idexo has sought to maintain the loyalty of its retailers, in part through a very lax credit policy. This policy affects Idexo's working capital requirements: For every extra day that customers take to pay, another day's sales revenue is added to accounts receivable (rather than received in cash), From Idexo's current income and balance sheet (Table 1), we can estimate the number of days of recelvables as: Accounts Receivable Days Accounts Receivable (s) X 365 Days Sales Revenue (8) 20 Million X 365 = 73 Days 100 Million The standard for the industry is 45 days. Ferris believes that Idexo can tighten its credit policy to achieve this goal without sacrificing sales. Ferris does not foresee any other significant improvements in Idexo's working capital management, and expects inventories and accounts payable to increase proportionately with sales growth. The firm will also need to maintain a minimum cash balance equal to 30 days' sales revenue to meet its liquidity needs. It earns no interest on this minimal balance, and Ferris plans to pay out all excess cash each year to the firm's shareholders as dividends. Capital Structure Changes: Levering Up Idexo currently has $20 million in debt outstanding with an interest rate of 6.8%, and it will pay 1892 words English (United States) Focus Page 3 of 5 124 Test On IS di didice, dnu reis plans to pay out dir excess Coach year cu firm's shareholders as dividends. Styles Styles Pand Capital Structure Changes: Levering Up Idexo currently has $20 million in debt outstanding with an interest rate of 6.8%, and it will pay interest only on this debt during the next five years. The firm will also obtain additional financing at the end of years 2019 and 2020 associated with the expansion of its manufacturing plant, as shown in Table 4. While Idexo's credit quality will likely improve by that time, interest rates may also increase somewhat. You expect that rates on these future loans will be about 6.8% as well. Given Idexo's outstanding debt, its interest expense each year is computed as: 1 Interest in Yeart = Interest Rate x Ending Balance in Yeart-1 The interest on the debt will provide a valuable tax shield to offset Idexo's taxable income. Table 4 Idexo's Debt and Interest Forecast 1 Year 2016 2017 2019 2021 2 Debt and Interest Table (5000s) 3 Outstanding Debt 20,000 20,000 20,000 35,000 40,000 40,000 4 Interest on Term Loan (6.80%) -1,360 -1,360 -1,360 -2,380 2,720 2018 2020 4. Recall that Idexo plans to mintain only the minimal necessary cash and pay out all excess cash as dividends. a. Suppose that at the very end of 2016 Ferris plans to use all excess cash to pay an immediate dividend. How much cash can the firm pay out at this time? Compute a new 2016 balance sheet reflecting this dividend using the spreadsheet distributed as a separate file. b. Forecast the cash available to pay dividends in future years--the firm's free cash flow to equity-by adding any new borrowing and subtracting after-tax interest expenses from free cash flow each year. Will Idexo have sufficient cash to pay dividends in all years? Explain. c. Using your forecast of the firm's dividends, construct a pro forma balance sheet for Idexo over the next five years (you can use the worksheet titled "Projected Balance Sheet". BIU abe X2 X? = = = Styless Idexo Corporation is a privately held designer and manufacturer of licensed college apparel in Cincinnati, Ohio. In late 2016, after several years of lackluster performance, the firm's owner and founder, Rebecca Ferris, returned from retirement to replace the current CEO, reinvigorate the firm, and plan for its eventual sale or possible IPO. She has hired you to assist with developing the firm's financial plan for the next five years. In 2016, Idexo had total assets of about $103 million and annual sales of $100 million (see Table 1). The firm was profitable, with expected 2016 earnings of more than $9 million, for a net profit margin of 9.1%. However, revenue growth has slowed dramatically in recent years and the firm's net profit margin has actually beek declining, Ferris is convinced the firm can do better. After only several weeks at the helm, she has already identified a number of potential improvements to drive the firm's future growth Year 2016 Table 1 Idexo's 2016 Income Statement and Balance Sheet 1 Year 2016 1 2 Income Statement ($000s) 2 Balance Sheet ($000s) 3 Sales 100,000 3 Assets 4 Cost of Goods Sold 4 Cash and Cash Equivalents S Raw Materials -21,3335 Accounts Receivable 6 Direct Labor Costs -24,000 6 Inventories 7 Gross Profit 54,6677 Total Current Assets 18 Sales and Marketing -15,000 8 Property, Plant, and Equipment Administration -18,000 9 Goodwill 10 EBITA 21,667 10 Total Assets 11 Depreciation -6,667 11 Liabilities and Stockholders' Equity 12 EBIT 15,000 12 Accounts Payable 13 Interest Expense (net) -1,021 13 Debt 14 Pretax Income 13,979 14 Total Liabilities 15 Income Tax -4,893 15 Stockholders' Equity 1692 words English (United States) Focus 15,000 20,000 8,219 43,219 60,000 103,219 6,205 20,000 26,205 77,014 A. A. Styles Styles Pane 60,000 103,219 BIU obe X, XA 8 Sales and Marketing 9 Administration 10 EBITA 11 Depreciation 12 EBIT 13 Interest Expense (net) 14 Pretax income 15 Income Tax 16 Net Income -15,000 -18,000 21,667 -6,667 15,000 - 1,021 13,979 -4,893 9,086 8 Property, Plant, and Equipment 9 Goodwill 10 Total Assets 11 Liabilities and Stockholders' Equity 12 Accounts Payable 13 Debt 14 Total Liabilities 15 Stockholders' Equity 16 Total Liabilities and Equity 6,205 20,000 26,205 77,014 103,219 1 Operational Improvements On the operational side, Ferris is quite optimistic regarding the company's prospects. The market is expected to grow by 6% per year, and Idexo produces a superior product. Idexo's market share has not grown in recent years because prior management devoted insufficient resources to product development, sales, and marketing. At the same time, Idexo has overspent on administrative costs. Indeed, from Table 1, Idexo's current administrative expenses are $18 Calibri (Body) 12 A A A Paste Styles Styles Pane 2020 2021 1.0% 25,250 14.0% B I U - obe X, XA Table 2 Idexo's Sales and Operating Cost Projections 1 Year 2016 2017 2018 2019 2 Sales Data Growth/Yr 3 Market Size (000s units) 6.0% 20,000 21,200 22,472 23,820 4 Market Share 10.0% 11.0% 12.0% 13.0% 5 Average Sales Price (S/unit) 2.0% 50.00 51.00 52.02 53.06 6 7 Operating Expense and Tax Data 8 Gross Margin 54.7% 53.0% 53.0% 53.0% 9 Sales and Marketing (% sales) 15.0% 16,5% 18.0% 19.5% 10 Administration (% sales) 1 18.0% 15.0% 15.0% 14.0% 11 Tax Rate 35.0% 35.0% 35.0% 35.0% *Market share growth is expected through 2020 only 26,765 14.0% 55.20 54,12 53.0% 20.096 13,096 35.0% 53.0 20.0% 13.00 35.09 Expansion Plans Table 3 shows the forecast for Idexo's capital expenditures over the next five years. Based on the estimates for capital expenditures and depreciation, this spreadsheet tracks the book value of Idexo's plant, property, and equipment starting from its level at the end of 2016. Note that Investment is expected to remain relatively low over the next two years--slightly below depreciation. Idexo will expand production during this period by using its existing plant more efficiently 2019 2020 2021 Table 3 Idexo's Capital Expenditure Forecast 1 Year 2016 2017 2018 2 Fixed Assets and Capital Investment (5000s) 3 Opening Book Value 60,167 60,000 58,500 4 Capital Investment 6,500 5,000 5,000 5 Depreciation -6,6676,500 -6,350 6 Closing Book Value 60,000 58,500 57.150 57,150 25,000 -8.215 73,935 73,935 12,000 -8,594 77 341 77,341 8.000 -8,534 76,807 Page 2 of 5 1692 words English (United States) Focus BIU obe X, XA Styles Styles Pane However, once Idexo's volume grows by more than 50% over its current level, the firm will need to undertake a major expansion to increase its manufacturing capacity. Based on the projections in Table 2, sales growth exceeds 50% of current sales in 2019. Therefore, Table 3 budgets for a major expansion of the plant at that time, leading to a large increase in capital expenditures in 2019 and 2020. Working Capital Management To compensate for its weak sales and marketing efforts, Idexo has sought to maintain the loyalty of its retailers, in part through a very lax credit policy. This policy affects Idexo's working capital requirements: For every extra day that customers take to pay, another day's sales revenue is added to accounts receivable (rather than received in cash), From Idexo's current income and balance sheet (Table 1), we can estimate the number of days of recelvables as: Accounts Receivable Days Accounts Receivable (s) X 365 Days Sales Revenue (8) 20 Million X 365 = 73 Days 100 Million The standard for the industry is 45 days. Ferris believes that Idexo can tighten its credit policy to achieve this goal without sacrificing sales. Ferris does not foresee any other significant improvements in Idexo's working capital management, and expects inventories and accounts payable to increase proportionately with sales growth. The firm will also need to maintain a minimum cash balance equal to 30 days' sales revenue to meet its liquidity needs. It earns no interest on this minimal balance, and Ferris plans to pay out all excess cash each year to the firm's shareholders as dividends. Capital Structure Changes: Levering Up Idexo currently has $20 million in debt outstanding with an interest rate of 6.8%, and it will pay 1892 words English (United States) Focus Page 3 of 5 124 Test On IS di didice, dnu reis plans to pay out dir excess Coach year cu firm's shareholders as dividends. Styles Styles Pand Capital Structure Changes: Levering Up Idexo currently has $20 million in debt outstanding with an interest rate of 6.8%, and it will pay interest only on this debt during the next five years. The firm will also obtain additional financing at the end of years 2019 and 2020 associated with the expansion of its manufacturing plant, as shown in Table 4. While Idexo's credit quality will likely improve by that time, interest rates may also increase somewhat. You expect that rates on these future loans will be about 6.8% as well. Given Idexo's outstanding debt, its interest expense each year is computed as: 1 Interest in Yeart = Interest Rate x Ending Balance in Yeart-1 The interest on the debt will provide a valuable tax shield to offset Idexo's taxable income. Table 4 Idexo's Debt and Interest Forecast 1 Year 2016 2017 2019 2021 2 Debt and Interest Table (5000s) 3 Outstanding Debt 20,000 20,000 20,000 35,000 40,000 40,000 4 Interest on Term Loan (6.80%) -1,360 -1,360 -1,360 -2,380 2,720 2018 2020 4. Recall that Idexo plans to mintain only the minimal necessary cash and pay out all excess cash as dividends. a. Suppose that at the very end of 2016 Ferris plans to use all excess cash to pay an immediate dividend. How much cash can the firm pay out at this time? Compute a new 2016 balance sheet reflecting this dividend using the spreadsheet distributed as a separate file. b. Forecast the cash available to pay dividends in future years--the firm's free cash flow to equity-by adding any new borrowing and subtracting after-tax interest expenses from free cash flow each year. Will Idexo have sufficient cash to pay dividends in all years? Explain. c. Using your forecast of the firm's dividends, construct a pro forma balance sheet for Idexo over the next five years (you can use the worksheet titled "Projected Balance Sheet