Q7

Hatfield Medical Supply's 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, Novak's 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 Hatfield's 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 Hatfield's latest financial statements plus some ratios and other data that Novak plans to use in her analysis.

Selected Ratios, Calculations, and Other Data, 2018

Cash

90

Sales

9,001

Accts. rec.

1,260

Op. costs (excl. depr.)

8,101

Inventories

1,440

Depreciation

360

Total CA

2,790

EBIT

540

Net fixed assets

3,600

Interest

144

Total assets

6,390

Pretax earnings

396

Taxes (25%)

99

Accts. pay. & accruals

1,620

Net income

297

Line of credit

-

Total CL

1,620

Dividends

100

Long-term debt

1,800

Add. to RE

197

Total liabilities

3,420

Common shares

50

Common stock

2,100

EPS

6

Retained earnings

870

DPS

2

Total common equity

2,970

Ending stock price

41

Total liab. & equity

6,390

Other Ratios

Hatfield

Industry

Profit margin (M)

3%

6%

Return on assets (ROA)

5%

10%

Return on equity (ROE)

10%

15%

Sales/Assets

1.41

1.69

Asset/Equity

2.15

1.59

Debt/TA

28%

17%

(Total liabilities)/(Total assets)

54%

37%

Times interest earned

3.80

11.70

P/E ratio

6.90

16.00

OP ratio: NOPAT/Sales

5%

6%

a.Forecast the balance sheet and income statements for 2019 using the following preliminary financial policy. Hatfield's sales growth rate is 11.1% for 2019.

i.Regular dividends will grow by 10%.

ii.No additional long-term debt or common stock will be issued.

iii.The interest rate on all debt is 8%.

iv.Interest expense for long-term debt is based on the average balance during the year.

v.If the operating results and the preliminary financing plan cause a financing deficit, eliminate the deficit by drawing on a line of credit. The line of credit would be tapped on the last day of the year, so it would create no additional interest expenses for that year.

b. If there is a financing surplus, eliminate it by paying a special dividend. After forecasting the 2019 financial statements, answer the following questions.

i.How much will Hatfield need to draw on the line of credit?

ii.What are some alternative ways than those in the preliminary financial policy that Hatfield might choose to eliminate the financing deficit?