The Knee Depot Ratio Analysis The Knee Depot Case

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.Forecast the Balance Sheet and Income Statement for 2013. In this scenario (call it the Steady Scenario) operations are not changed in any way. What is the AFN? Calculate the following items: FCF, ROIC, EPS, DPS and ROE. Use the following assumptions:

Operating ratios stay the same

No additional long-term debt or equity is issued

Interest rate on all debt is 10%

Any additional funding will be acquired through a line of credit on the last day of the year (thus no interest for 2013)

Dividends will grow by 15%

Sales will grow by 15%

2.Repeat the analysis in question 1, but this time call it the Improved Scenario and assume that KD changes its operations such that it achieves industry averages for the following items:

Operating costs / Sales

Receivables / Sales

Fixes Assets / Sales