Use the AFN equation to estimate Hatfield’s required new external capital for 2020 if the sales growth rate is 11.1%. Assume that the firm’s 2019 ratios will remain the same in 2020. (Hint: Hatfield was operating at full capacity in 2019.)
Use the AFN equation to estimate Hatfield’s required new external capital for 2020 if the sales growth rate is 11.1%. Assume that the firm’s 2019 ratios will remain the same in 2020. (Hint: Hatfield was operating at full capacity in 2019.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Use the AFN equation to estimate Hatfield’s required new external capital for 2020 if the sales growth rate is 11.1%. Assume that the firm’s 2019 ratios will remain the same in 2020. (Hint: Hatfield was operating at full capacity in 2019.)
Transcribed Image Text:**Chapter 12: Corporate Valuation and Financial Planning**
**Page 535**
**Selected Additional Data for 2019**
- **Ratios:**
- (Op. costs)/Sales: Hatfield 90%, Industry 88%
- Depr./FA: Hatfield 10%, Industry 12%
- Cash/Sales: Hatfield 2%, Industry 2%
- Receivables/Sales: Hatfield 14%, Industry 16%
- Inventories/Sales: Hatfield 11%, Industry 11%
- Fixed assets/Sales: Hatfield 46%, Industry 49%
- (Acc. pay. & accr.)/Sales: Hatfield 12%, Industry 15%
- Tax rate: Hatfield 25%, Industry 25%
- Target WACC: Hatfield 11%, Industry 11%
- Interest rate on debt: Hatfield 8%, Industry 7%
- **Profitability & Ratios:**
- 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 1.57
- Debt/TA: Hatfield 28.2%, Industry 19.3%
- CR ratio: (Total liabilities)/(Total assets): Hatfield 53.5%, Industry 37.3%
- Times interest earned: Hatfield 3.8, Industry 11.7
- P/E ratio: Hatfield 8, Industry 16.0
- OP ratio: NOPAT/Sales: Hatfield 4.5%, Industry 6.1%
- CR ratio: (Total op. capital)/Sales: Hatfield 53.0%, Industry 49.0%
- ROIC: Hatfield 8.5%, Industry 13.0%
**Analysis Questions:**
a. Evaluate Hatfield’s performance compared to industry averages, identifying strengths and weaknesses using the given data and the DuPont equation.
b. Use the Additional Funds Needed (AFN) equation
Transcribed Image Text:**Educational Resource: Evaluating Corporate Valuation and Governance**
### Analyzing Return on Invested Capital (ROIC)
1. **Calculate ROIC and Growth Rate**:
- ROIC is derived as NOPAT divided by total net operating capital. Examine the last year’s ROIC and growth rate in free cash flow (FCF).
- Consider the long-term growth rate in FCF post-forecast period with constant ratios. Explore how Hensley's value might increase with growth equivalent to the ROIC.
- If ROIC exceeds WACC, growth adds value. Evaluate if exceeding WACC plus g indicates future growth benefits.
2. **Current Value of Operations**:
- Assess the horizon value at the end of the forecast. Compare with current total net operating capital for present valuation.
3. **Intrinsic Price Calculation**:
- Derive per share intrinsic price of common equity as of December 31, 2019.
### Mini Case: Hatfield Medical Supply
Hatfield's stock lagged behind industry averages, prompting a change in leadership. Jaiden Lee, with specialized financial expertise, joins to improve strategic forecasts. The prior CFO outputs data for Lee, aiming at elevating performance to meet industry standards.
#### Financial Statements Overview
**Balance Sheet as of 12/31/2019 (in Millions)**:
- **Assets**:
- Cash: $90
- Accounts Receivable: $1,260
- Inventories: $1,440
- Total Current Assets (CA): $2,790
- Net Fixed Assets: $3,600
- **Total Assets**: $6,390
- **Liabilities and Equity**:
- Accounts Payable & Accruals: $1,620
- Line of Credit: $0
- Total Current Liabilities (CL): $1,620
- Long-term Debt: $180
- Total Liabilities: $1,800
- Common Stock: $2,100
- Retained Earnings: $870
- Total Common Equity: $2,970
- **Total Liabilities & Equity**: $6,390
**Income Statement for Year Ending 2019**:
- Sales: $9,000.9
- Operating Costs (excluding depreciation): $8,100.9
- Depreciation: $360
- EBIT
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