Hatfield Medical Supply’s stock price had been lagging its industry averages, so

Question

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.

Hatfield Medical Supply: Balance Sheet (Millions of Dollars), December 31 Hatfield Medical Supply: Income Statement (Millions of Dollars Except per Share) 2016 2016 Cash $20 Sales $2,000.0 Accts. rec. $280 Op. costs (excl. depr.) $1,800.0 Inventories $400 Depreciation $50.0 Total CA $700 EBIT $150.0 Net fixed assets $500 Interest $40.0 Total assets $1,200 Pretax earnings $110.0 Taxes (40%) $44.0 Accts. pay. & accruals $80 Net income $66.0 Line of credit $0 Total CL $80 Dividends $20.0 Long-term debt $500 Add. to RE $46.0 Total liabilities $580 Common shares 10.0 Common stock $420 EPS $6.6 Retained earnings $200 DPS $2.0 Total common equ. $620 Ending stock price $52.80 Total liab. & equity $1,200 Selected Ratios and Other Data, 2016 Hatfield Industry Hatfield Industry (Op. costs)/Sales 90% 88% (Total liabilities)/(Total assets) 48.3% 36.7% Depr./FA 10% 12% Times interest earned 3.8 8.9 Cash/Sales 1% 1% Return on assets (ROA) 5.5% 10.2% Receivables/Sales 14% 11% Profit margin (M) 3.30% 4.99% Inventories/Sales 20% 15% Sales/Assets 1.67 2.04 Fixed assets/Sales 25% 22% Assets/Equity 1.94 1.58 (Acc. pay. & accr.)/Sales 4% 4% Return on equity (ROE) 10.6% 16.1% Tax rate 40% 40% P/E ratio 8.0 16.0 ROIC 8.0% 12.5% NOPAT/Sales 4.5% 5.6% (Total op. capital)/Sales 56.0% 45.0%

Explanation / Answer

As companre to WACC, ROIC is better. It show Company is creating value for investor

Answer 1 Year Sl. No. 2017 2018 2019 2020 Sales a 2200.00 2376.00 2494.80 2619.54 Cash b 22.00 23.76 24.95 26.20 Accounts Receivables c 308.00 332.64 349.27 366.74 Inventories d 440.00 475.20 498.96 523.91 Net Fixed Assets e 550.00 594.00 623.70 654.89 Account payable & Accruals f 88.00 95.04 99.79 104.78 Operating Cost(excl Dep.) g 1980.00 2138.40 2245.32 2357.59 Depreciation h 55.00 59.40 62.37 65.49 EBIT (a-g-h) i 165.00 178.20 187.11 196.47 Answer 2 NOPAT (a*4.5%) j 99.00 106.92 112.27 117.88 Net Operating Working Capital (b+c+d-f) k 682.00 736.56 773.39 812.06 Total Operating Capital (a*56%) l 1232.00 1330.56 1397.09 1466.94 Free Cash Flow m       NOPAT j 99.00 106.92 112.27 117.88       Depreciation h 55.00 59.40 62.37 65.49       Operating cash flow (j+h)     n 154.00 166.32 174.64 183.37 Changes in working capital o 62.00 54.56 36.83 38.67 (working capital in 2016 =620) Capital Expenditure (2016= 500) p 50.00 44.00 29.70 31.18 Dividend q 29.70 32.08 33.68 35.36 Free Cash Flow (m = n-o-p-q) m 12.30 35.68 74.43 78.15 Annual Growth rate in FCF r 190.11 108.58 5.00 ROIC s 10.16% 10.01% 9.93% 9.85% No need of external financing in 2017 for free cash flow. WACC t 9% 9% 9% 9%

As companre to WACC, ROIC is better. It show Company is creating value for investor

Answer 3 Horizon value of cash flow of 2020 Cash flow at 2020 78.15 Horizon value of cash flow of 2020 2051.43 Present value of Horizon cash flow of 2020 Horizion Cash flow 2051.43 PV 9%, 4 years 0.708 PV of HCF 1452.41 Present value of for casted FCF Year 2017.00 2018.00 2019.00 2020.00 FCF 12.30 35.68 74.43 78.15 PV 9% 0.917 0.842 0.772 0.708 PV of FCF 11.28 30.05 57.46 55.33 Current value of opertaion 154.11 Intrisinc value of 2017 EPS in 2017 9.90 Avg P/E ratio 8 Intrisinc value of 2017 79.20

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