Question # 07 [10 marks 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% 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? What are some alternative ways than those in the preliminary financial policy that Hatfield might choose to eliminate the financing deficit? 11. Question # 07 [10 marks 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% 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? What are some alternative ways than those in the preliminary financial policy that Hatfield might choose to eliminate the financing deficit? 11