You are a financial analyst in the financial planning and analysis department of EMC. You have been assigned the following:

• Complete a five-year forecast (2021 to 2025) based on the above assumptions.
• Explain why the dividend payout ratio would be reduced and show the impact on dividends per share comparing 2020 to 2021, which 2021 reflects the lower payout ratio. Based on 2021, explain if EMC is, more or less leveraged than the competitors.
• Management has indicated that a multiple of 9x EBITDA is reasonable to value the invested capital of the company. Explain if and why shareholder value has been created or reduced as a result of the SRC the acquisition when comparing the 2020 value per share (without the SRC acquisition) to the 2021 value per share (with the SRC acquisition).

Overview: Environmental Management Corporation (EMC) is a regional waste management and environmental services company serving the tri-state region of Pennsylvania, New Jersey, and Delaware. EMC has been reviewing opportunities to expand out of its current geographical region. The corporate development department identified an opportunity, Southern Removal Corp. (SRC), a privately owned company in the niche markets of Columbia, SC and Charlotte, NC that has had some operating issues and is over-leveraged. EMC has decided to move forward with an acquisition transaction and purchase the operating assets of SRC for $185 million.

2020 Financial Statistics ($ millions)

Company	Revenue	EBITDA	EBITDA Margin	EBIT	EBIT Margin
Republic Services	$10,160.0	$2,895.6	28.5%	$1,742.3	17.1%
Waste Connections	5,380.0	1,345.0	25.0%	595.0	11.1%
Waste Management	15,150.0	4,242.0	28.0%	2,575.1	17.0%

Company	Interest Expense	Debt	Equity	EBIT/ Interest	Debt/ EBITDA	Debt/ Equity
Republic Services	$450.0	$8,778.8	$8,375.0	4.1x	3.0x	1.1x
Waste Connections	155.0	4,702.1	6,800.0	3.8x	3.5x	.7x
Waste Management	450.0	10,422.0	7,200.0	5.7x	2.5x	1.4x

Forecast

A capital project analysis was completed which determined that EMC should move ahead with the acquisition as it has a positive NPV and IRR above EMCs required rate of return. Management now wants to understand the impact on EMCs financial statements going forward and how the acquisition will impact the income statement, balance sheet and debt level.

EMCs finance, corporate development and operations departments have developed the following five-year forecast assumptions for EMC which considers both its current operations and the addition of the SRCs operations. Income Statement

• 2020 EMC revenue will increase at an annual rate of 4.0%
• The SRC acquisition will add $60.0 million of incremental revenue in 2021 and it will increase at an annual rate of 5.0% thereafter
• Cost of services will be 62.0% of revenue
• SG&A expense will be 9.6% of revenue
• Depreciation expense will be 7.0% of revenue
• Interest expense will be based on the average debt outstanding and an interest rate of 7.0%
• Tax rate of 25.0%

Balance Sheet

• Constant operating cash level of $10.0 million
• Accounts receivable DSO of 32 days
• Inventory turnover of 29x (inventory consists of recyclable materials resold)
• Other long-term assets at 1.5% of cost of services (COS)
• Accounts payable days cost of services (COS) of 45 days
• Accrued expense 1.5% of revenue
• Other long-term liabilities 1.7% of revenue
• Dividend payout ratio reduced to 45% from 70% historically
• Maintenance capital expenditures of 8.5% of revenue
• Acquisition capital expenditures are the cost of the SRC acquisition in 2021 ($185.0 million), no acquisition capx beyond 2021
• EMC has 9 million shares outstanding

Forecast Actual 2018 Actual 2019 Actual 2020 Forecast 2021 Forecast 2023 Forecast 2024 Forecast 2025 2022 284,000.0 $ 300,000.0 $ 176,835.0 187,100.0 107,165.0 112,900.0 21,900.0 22,550.0 30,700.0 31,600.0 52,600.0 54,150.0 54,565.0 58,750.0 4,312.5 3,937.5 50,252.5 54,812.5 12,563.1 13,703.1 37,689.4 $ 41,109.4 $ 315,000.0 198,050.0 116,950.0 22,945.0 32,760.0 55,705.0 61,245.0 3,562.5 57,682.5 14,420.6 43,261.9 10,000.0 $ 10,000.0 $ 10,000.0 $ 10,000.0 $ 10,000.0 ENVIRONMENTAL MANAGEMENT CORPORATION (EMC)- ($000) Actual Actual 2016 2017 Income Statement Revenue $ 250,000.0 $ 268,000.0 $ Cost of services (COS) 155,000.0 167,000.0 Gross profit 95,000.0 101,000.0 Depreciation expense 20,325.0 22,415.0 SG&A expense 27,500.0 28,700.0 Total expenses 47,825.0 51 115.0 EBIT 47,175.0 49,885.0 Interest Expense 4,875.0 4,687.5 Pretax Profit 42,300.0 45,197.5 10,575.0 11,299.4 Net Income $ 31,725.0 $ 33,898.1 $ Balance Sheet Cash $ 5,000.0 $ 9,264.4 $ Accounts receivable 24,300.0 24,800.0 Inventory 5,200.0 5,500.0 Total current assets 34 500.0 39,564.4 Property, Plant, and Equipment-net 205,000.0 207,300.0 Other long-term assets 2,000.0 2.500.0 Total Assets 241,500.0 249,364.4 Accounts Payable 21,750.0 23,570.0 Accrued Expenses 3,150.0 3,525.0 Total Current Liabilities 24,900.0 27,095.0 Debt - long-term 65,000.0 60,000.0 Other long-term liabilities 3,500.0 4,000.0 Total Liabilities 93,400.0 91,095.0 Common stock 30,000.0 30,000.0 Retained earnings 118,100.0 128,269.4 Total Liabilities and Equity $ 241,500.0 $ 249,364.4 $ Revenue growth rate n/a 7.2% Common Size Revenue 100.0% 100.0% Cost of services (COS) 62.0% 62.3% Gross profit 38.0% 37.7% 11.0% 10.7% EBITDA margin 27.0% 27.0% Depreciation 8.1% 8.4% EBIT margin 18.9% 18.6% Interest expense 2.0% 1.7% % Earning before tax 16.9% 16.9% Taxes 4.2% 4.2% Net Income 12.7% 12.6% 14,096.3 $ 26,245.0 5,900.0 46,241.3 209,500.0 2,500.0 258,241.3 25,600.0 3,765.0 29,365.0 55,000.0 4,300.0 88,665.0 30,000.0 139,576.3 258,241.3 $ 6.0% 16,874.1 $ 26,900.0 6,460.0 50,234.1 213,900.0 3,000.0 267,134.1 26,505.0 4,020.0 30,525.0 50,000.0 4,700.0 85,225.0 30,000.0 151,909.1 267,134.1 $ 5.6% 20,782.6 $ 29,200.0 6,640.0 56,622.6 217,365.0 3,250.0 277,237.6 27,900.0 4,300.0 32,200.0 45,000.0 5,150.0 82,350.0 30,000.0 164,887.6 277,237.6 5.0% 30,000.0 30,000.0 30.000.0 30,000.0 30,000.0 SG&A expense 100.0% 62.3% 37.7% 10.8% 26.9% 7.7% 19.2% 1.5% 17.793 100.0% 62.4% 37.6% 10.5% 27.1% 7.5% 19.6% 1.3% 18.3% 4.6% 13.7% 100.0% 62.9% 37.1% 10.4% 26.7% 7.3% 19.4% 1.1% 18.3% 4.6% % 13.7% 13.3% $ 10,000.0 $ 10,000.0 $ 10,000.0 $ 10,000.0 10,000.0 5,000.0 $ 24,300.0 5,200.0 34,500.0 205,000.0 2,000.0 241,500.0 21,750.C 3,150.0 24,900.0 65,000.0 3,500.0 93,400.0 30,000.0 118,100.0 241,500.0 $ n/a 9,264,4 $ 24,800.0 5,500.0 39,564.4 207,300.0 2,500.0 249,364.4 23,570.0 3,525.0 27,095.0 60,000.0 4,000.0 91,095.0 30,000.0 128, 269.4 249,364.4 $ 7.2% 14,096.3 $ 26,245.0 5,900.0 46,241.3 209,500.0 2,500.0 258,241.3 25,600.0 3,765.0 29,365.0 55,000.0 4,300.0 88,665.0 30,000.0 139,576.3 258,241.3 $ 6.0% 16,874.1 $ 26,900.0 6,460.0 50,234.1 213,900.0 3,000.0 267,1341 26,505.0 4,020.0 30,525.0 50,000.0 4,700.0 85,225.0 30,000.0 151,909.1 267,134.1 $ 5.6% 20,782.6 $ 29,200.0 6,640.0 56,622.6 217,365.0 3,250.0 277,237.6 27,900.0 4,300.0 32,200.0 45,000.0 5,150.0 82,350.0 30,000.0 164,887.6 277,237.6 5.0% 30,000.0 30,000.0 30,000.0 30,000.0 30,000.0 $ Balance Sheet Cash Accounts receivable Inventory Total current assets Property, Plant, and Equipment - net Other long-term assets Total Assets Accounts Payable Accrued Expenses Total Current Liabilities Debt - long-term Other long-term liabilities Total Liabilities Common stock Retained earnings Total Liabilities and Equity Revenue growth rate Common Size Revenue Cost of services (COS) Gross profit SG&A expense EBITDA margin Depreciation EBIT margin Interest expense Earning before tax Taxes Net Income Ratlos Accounts receivable - DSO Inventory turnover Net PP&E as a % of revenue Other long-term assets % of COS Accounts payable - Days COS Accrued expense as a % of Revenue Other long-term liab. as a % of Revenue Dividend payout Dividends Maintenance Capital expenditures Capital expenditures as a % of revenue Tax rate Interest rate 100.0% 62.0% 38.0% 11.0% 27.0% 8.1% 18.9% 2.0% 16.9% 4.2% 12.7% 100.0% 62.3% 37.7% 10.7% 27.0% 8.4% 18.6% 1.7% 16.9% 4.2% 12.6% 100.0% 62.3% 37.7% 10.8% 26.9% 7.7% 19.2% 1.5% 17.7% 4.4% 13.3% 100.0% 62.4% 37.6% 10.5% 27.1% 7.5% 19.6% 1.3% 18.3% 4.6% 13.7% 100.0% 62.9% 37.1% 10.4% 26.7% 7.3% 19.4% 1.1% 18.3% 4.6% 13.7% 35.5 29.8 82.0% 1.3% 51.2 1.3% 1.4% 70.0% 22,207.5 $ 25,000.0 $ 10.0% 25.0% 33.8 30.4 77.4% 1.5% 51.5 1.3% 1.5% 70.0% 23,728.7 $ 24,715.0 $ 9.2% 25.0% 33.7 30.0 73.8% 1.496 52.8 1.3% 1.5% 70.0% 26,382.6 $ 24,100.0 $ 8.5% 25.0% 32.7 29.0 71.3% 1.6% 51.7 1.3% 1.6% 70.0% 28,776.6 $ 26,950.0 $ 9.0% 25.0% 33.8 29.8 69.0% 1.6% 51.4 1.4% 1.6% 70.0% 30,283.3 26,410.0 8.4% 25.0% $ $ ENVIRONMENTAL MANAGEMENT CORPORATION (EMC) - FIN 3504 Spring 2021 ($000) Actual 2020 Forecast 2021 Forecast 2022 Forecast 2023 Forecast 2024 Forecast 2025 $ 315,000.0 Revenue Projections Current revenue - EMC Acquisition revenue - SRC Total revenue EMC revenue growth rate assumption SRC revenue growth rate assumption $ 315,000.0 n/a ENVIRONMENTAL MANAGEMENT CORPORATION (EMC) - FIN 3504 Spring 2021 ($000) Forecast Actual 2020 Forecast 2021 Forecast 2022 Forecast 2024 Forecast 2025 2023 n/a n/a n/a n/a 217,365.0 n/a n/a n/a PP&E Scehdule - Net Beginning balance Maintenance capital expenditures Acquisition of SRC Assets Depreciation Ending Balance Retained Earnings Schedule Beginning balance Net income Dividends Ending balance n/a $ n/a n/a n/a 164,887.6 $ Forecast Actual 2018 Actual 2019 Actual 2020 Forecast 2021 Forecast 2023 Forecast 2024 Forecast 2025 2022 284,000.0 $ 300,000.0 $ 176,835.0 187,100.0 107,165.0 112,900.0 21,900.0 22,550.0 30,700.0 31,600.0 52,600.0 54,150.0 54,565.0 58,750.0 4,312.5 3,937.5 50,252.5 54,812.5 12,563.1 13,703.1 37,689.4 $ 41,109.4 $ 315,000.0 198,050.0 116,950.0 22,945.0 32,760.0 55,705.0 61,245.0 3,562.5 57,682.5 14,420.6 43,261.9 10,000.0 $ 10,000.0 $ 10,000.0 $ 10,000.0 $ 10,000.0 ENVIRONMENTAL MANAGEMENT CORPORATION (EMC)- ($000) Actual Actual 2016 2017 Income Statement Revenue $ 250,000.0 $ 268,000.0 $ Cost of services (COS) 155,000.0 167,000.0 Gross profit 95,000.0 101,000.0 Depreciation expense 20,325.0 22,415.0 SG&A expense 27,500.0 28,700.0 Total expenses 47,825.0 51 115.0 EBIT 47,175.0 49,885.0 Interest Expense 4,875.0 4,687.5 Pretax Profit 42,300.0 45,197.5 10,575.0 11,299.4 Net Income $ 31,725.0 $ 33,898.1 $ Balance Sheet Cash $ 5,000.0 $ 9,264.4 $ Accounts receivable 24,300.0 24,800.0 Inventory 5,200.0 5,500.0 Total current assets 34 500.0 39,564.4 Property, Plant, and Equipment-net 205,000.0 207,300.0 Other long-term assets 2,000.0 2.500.0 Total Assets 241,500.0 249,364.4 Accounts Payable 21,750.0 23,570.0 Accrued Expenses 3,150.0 3,525.0 Total Current Liabilities 24,900.0 27,095.0 Debt - long-term 65,000.0 60,000.0 Other long-term liabilities 3,500.0 4,000.0 Total Liabilities 93,400.0 91,095.0 Common stock 30,000.0 30,000.0 Retained earnings 118,100.0 128,269.4 Total Liabilities and Equity $ 241,500.0 $ 249,364.4 $ Revenue growth rate n/a 7.2% Common Size Revenue 100.0% 100.0% Cost of services (COS) 62.0% 62.3% Gross profit 38.0% 37.7% 11.0% 10.7% EBITDA margin 27.0% 27.0% Depreciation 8.1% 8.4% EBIT margin 18.9% 18.6% Interest expense 2.0% 1.7% % Earning before tax 16.9% 16.9% Taxes 4.2% 4.2% Net Income 12.7% 12.6% 14,096.3 $ 26,245.0 5,900.0 46,241.3 209,500.0 2,500.0 258,241.3 25,600.0 3,765.0 29,365.0 55,000.0 4,300.0 88,665.0 30,000.0 139,576.3 258,241.3 $ 6.0% 16,874.1 $ 26,900.0 6,460.0 50,234.1 213,900.0 3,000.0 267,134.1 26,505.0 4,020.0 30,525.0 50,000.0 4,700.0 85,225.0 30,000.0 151,909.1 267,134.1 $ 5.6% 20,782.6 $ 29,200.0 6,640.0 56,622.6 217,365.0 3,250.0 277,237.6 27,900.0 4,300.0 32,200.0 45,000.0 5,150.0 82,350.0 30,000.0 164,887.6 277,237.6 5.0% 30,000.0 30,000.0 30.000.0 30,000.0 30,000.0 SG&A expense 100.0% 62.3% 37.7% 10.8% 26.9% 7.7% 19.2% 1.5% 17.793 100.0% 62.4% 37.6% 10.5% 27.1% 7.5% 19.6% 1.3% 18.3% 4.6% 13.7% 100.0% 62.9% 37.1% 10.4% 26.7% 7.3% 19.4% 1.1% 18.3% 4.6% % 13.7% 13.3% $ 10,000.0 $ 10,000.0 $ 10,000.0 $ 10,000.0 10,000.0 5,000.0 $ 24,300.0 5,200.0 34,500.0 205,000.0 2,000.0 241,500.0 21,750.C 3,150.0 24,900.0 65,000.0 3,500.0 93,400.0 30,000.0 118,100.0 241,500.0 $ n/a 9,264,4 $ 24,800.0 5,500.0 39,564.4 207,300.0 2,500.0 249,364.4 23,570.0 3,525.0 27,095.0 60,000.0 4,000.0 91,095.0 30,000.0 128, 269.4 249,364.4 $ 7.2% 14,096.3 $ 26,245.0 5,900.0 46,241.3 209,500.0 2,500.0 258,241.3 25,600.0 3,765.0 29,365.0 55,000.0 4,300.0 88,665.0 30,000.0 139,576.3 258,241.3 $ 6.0% 16,874.1 $ 26,900.0 6,460.0 50,234.1 213,900.0 3,000.0 267,1341 26,505.0 4,020.0 30,525.0 50,000.0 4,700.0 85,225.0 30,000.0 151,909.1 267,134.1 $ 5.6% 20,782.6 $ 29,200.0 6,640.0 56,622.6 217,365.0 3,250.0 277,237.6 27,900.0 4,300.0 32,200.0 45,000.0 5,150.0 82,350.0 30,000.0 164,887.6 277,237.6 5.0% 30,000.0 30,000.0 30,000.0 30,000.0 30,000.0 $ Balance Sheet Cash Accounts receivable Inventory Total current assets Property, Plant, and Equipment - net Other long-term assets Total Assets Accounts Payable Accrued Expenses Total Current Liabilities Debt - long-term Other long-term liabilities Total Liabilities Common stock Retained earnings Total Liabilities and Equity Revenue growth rate Common Size Revenue Cost of services (COS) Gross profit SG&A expense EBITDA margin Depreciation EBIT margin Interest expense Earning before tax Taxes Net Income Ratlos Accounts receivable - DSO Inventory turnover Net PP&E as a % of revenue Other long-term assets % of COS Accounts payable - Days COS Accrued expense as a % of Revenue Other long-term liab. as a % of Revenue Dividend payout Dividends Maintenance Capital expenditures Capital expenditures as a % of revenue Tax rate Interest rate 100.0% 62.0% 38.0% 11.0% 27.0% 8.1% 18.9% 2.0% 16.9% 4.2% 12.7% 100.0% 62.3% 37.7% 10.7% 27.0% 8.4% 18.6% 1.7% 16.9% 4.2% 12.6% 100.0% 62.3% 37.7% 10.8% 26.9% 7.7% 19.2% 1.5% 17.7% 4.4% 13.3% 100.0% 62.4% 37.6% 10.5% 27.1% 7.5% 19.6% 1.3% 18.3% 4.6% 13.7% 100.0% 62.9% 37.1% 10.4% 26.7% 7.3% 19.4% 1.1% 18.3% 4.6% 13.7% 35.5 29.8 82.0% 1.3% 51.2 1.3% 1.4% 70.0% 22,207.5 $ 25,000.0 $ 10.0% 25.0% 33.8 30.4 77.4% 1.5% 51.5 1.3% 1.5% 70.0% 23,728.7 $ 24,715.0 $ 9.2% 25.0% 33.7 30.0 73.8% 1.496 52.8 1.3% 1.5% 70.0% 26,382.6 $ 24,100.0 $ 8.5% 25.0% 32.7 29.0 71.3% 1.6% 51.7 1.3% 1.6% 70.0% 28,776.6 $ 26,950.0 $ 9.0% 25.0% 33.8 29.8 69.0% 1.6% 51.4 1.4% 1.6% 70.0% 30,283.3 26,410.0 8.4% 25.0% $ $ ENVIRONMENTAL MANAGEMENT CORPORATION (EMC) - FIN 3504 Spring 2021 ($000) Actual 2020 Forecast 2021 Forecast 2022 Forecast 2023 Forecast 2024 Forecast 2025 $ 315,000.0 Revenue Projections Current revenue - EMC Acquisition revenue - SRC Total revenue EMC revenue growth rate assumption SRC revenue growth rate assumption $ 315,000.0 n/a ENVIRONMENTAL MANAGEMENT CORPORATION (EMC) - FIN 3504 Spring 2021 ($000) Forecast Actual 2020 Forecast 2021 Forecast 2022 Forecast 2024 Forecast 2025 2023 n/a n/a n/a n/a 217,365.0 n/a n/a n/a PP&E Scehdule - Net Beginning balance Maintenance capital expenditures Acquisition of SRC Assets Depreciation Ending Balance Retained Earnings Schedule Beginning balance Net income Dividends Ending balance n/a $ n/a n/a n/a 164,887.6 $