Define the term self-supporting growth rate. What is Hatfield’s self-supporting growth rate? Would the self-supporting growth rate be affected by a change in the capital intensity ratio or the other factors mentioned in the previous question? Other things held constant, would the calculated capital intensity ratio change over time if the company were growing and were also subject to economies of scale and/or lumpy assets? ### Educational Content: Understanding Corporate Valuation and Governance#### Key Concepts in Evaluating Company Performance1. **Return on Invested Capital (ROIC)** - **Definition**: ROIC is calculated as NOPAT (Net Operating Profit After Taxes) divided by Total Net Operating Capital. - **Purpose**: It helps determine the efficiency of a company in generating profits from its capital investments. - **Calculation Challenge**: Analyze the ROIC and the growth rate in free cash flow. Consider whether the ROIC exceeds the company's WACC (Weighted Average Cost of Capital).2. **Current and Horizon Value of Operations** - **Method**: Calculate the value of operations at the end of a forecast period using growth assumptions. - **Comparison**: Compare the current value of operations to the total net operating capital. - **Hint**: For accurate calculations, ensure the growth rate in future cash flows is reasonable and assess how it impacts the firm’s valuation over time.3. **Intrinsic Stock Price Evaluation** - Calculate the intrinsic price of common equity as of a specific date, reflecting true company worth beyond market fluctuations.#### Mini Case Study: Hatfield Medical SupplyHatfield Medical Supply's performance lagged, sparking leadership change. Jaiden Lee, a new CEO with financial planning expertise, was appointed to steer the company forward.**Financial Data Overview for December 31, 2019**- **Balance Sheet Highlights** - Total Assets: $6,390 million - Liabilities & Equity Split: Common stock ($2,100 million), Retained earnings ($870 million), Total liabilities ($1,800 million) - Key Current Assets: Cash ($90 million), Accounts receivable ($1,260 million), Inventories ($1,440 million)- **Income Statement Summary** - Sales: $9,009 million - Operating Costs: $8,100 million - Net Income: $297 million after accounting for taxes at a 25% rate- **Additional Financial Ratios and Share Data** - Dividends: $100 million - Earnings Per Share (EPS): $5.94 - Dividends Per Share (DPS): $2.00 - Ending Stock Price: $40.00 per shareThis comprehensive financial snapshot aids in the strategic analysis and valuation for potential improvements and investment evaluations.#### Discussion Points- **Strateg ### Selected Additional Data for 2019#### Metrics for Hatfield vs. Industry Averages- **(Op. costs)/Sales**: - Hatfield: 90% - Industry: 88%- **Depr./FA**: - Hatfield: 10% - Industry: 12%- **Cash/Sales**: - Hatfield: 5% - Industry: 10%- **Receivables/Sales**: - Hatfield: 14% - Industry: 16%- **Inventories/Sales**: - Hatfield: 11% - Industry: 15%- **Fixed assets/Sales**: - Hatfield: 20% - Industry: 16%- **(Acc. pay. & accr.)/Sales**: - Hatfield: 18% - Industry: 12%- **Tax rate**: - Hatfield: 25% - Industry: 25%- **Target WACC**: - Hatfield: 10% - Industry: 11%- **Interest rate on debt**: - Hatfield: 8% - Industry: 7%#### Financial Ratios for Hatfield vs. Industry Averages- **Profit margin (M)**: - Hatfield: 3.30% - Industry: 5.60%- **Return on assets (ROA)**: - Hatfield: 4.6% - Industry: 9.5%- **Return on equity (ROE)**: - Hatfield: 10.0% - Industry: 15.1%- **Sales/Assets**: - Hatfield: 1.39 - Industry: 1.69- **Asset/Equity**: - Hatfield: 2.15 - Industry: 1.59- **Debt/TA**: - Hatfield: 28.2% - Industry: 36.7%- **CR ratio** ((Total liabilities)/(Total assets)): - Hatfield: 53.5% - Industry: 57.3%- **Times interest earned**: - Hatfield: 3.8 - Industry: 11.7- **P/E ratio**: - Hat

Self supporting growth rate is the maximum possible growth the company can exhibit in terms of its sales without any external financing. Therefore, it is the rate or degree of growth when no borrowing of money has occurred. Self Supporting growth rate can be calculated using the below formula: Profit Margin "PM" = Net Profit / Sales = $297/$9000.9 = 3.2996700329967% Payout ratio = Dividend/Net Income= $100/$297 = 33.6700336700337% Current Level of Sales S0 = $9000.9 Current Level of Assets "A0" = $6390 Current Liabilities L0 = $1620 g=PM×1-payout ratio×S0A0-L0-PM1-pay out ratioS0=3.2996700329967%×1-33.6700336700337%×$9000.9$6390-$1620-3.2996700329967%1-33.6700336700337%$9000.9=$197$6390-$1620-$197=$197$4573=4.30789416138202% Hence, self supporting growth rate is 4.31%. Capital Intensity ratio is the amount of assets which the company would require to generate $1 of sales. Hence, for a company which has high capital intensity ratio, they would require higher amount of assets to generate $1 sales. Also, when profit margin increases, the retention ratio of the firm would increases. This will boost the self supporting growth rate of the company. Hence, high capital intensity ratio would decrease the firm's self supporting growth rate but high profit margin would increase the same. If all the factors which affects the growth rate is held constant, then as the company's grows, the capital intensity ratio of the firm would increase considering the economies of scale and presence of lumpy assets. As the magnitude of business increases the requirement of asset would also increase and the amount of this asset would increase too because of the presence of lumpy assets. Hence, when the Capital intensity ratio increases tremendously, then the self sustaining growth rate would decrease and firm would require to borrow externally.