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    AFN CH 12 Mini Case Study

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    Muhammad Ali Samar
    Hatfield Medical Supplies brought in a new CEO and CFO to improve financial performance. The CFO, Ashley Novak, analyzed Hatfield's financial ratios compared to industry averages and found weaknesses. Novak will use this data to develop the financial plan section of Hatfield's strategic plan and determine how much new external capital is needed for a 10% sales growth in 2014.

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    AFN CH 12 Mini Case Study

    Uploaded by

    Muhammad Ali Samar
    306 views3 pages
    Hatfield Medical Supplies brought in a new CEO and CFO to improve financial performance. The CFO, Ashley Novak, analyzed Hatfield's financial ratios compared to industry averages and found weaknesses. Novak will use this data to develop the financial plan section of Hatfield's strategic plan and determine how much new external capital is needed for a 10% sales growth in 2014.

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    AFN Ch 12 Mini Case study

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    Hatfield Medical Supplies brought in a new CEO and CFO to improve financial performance. The CFO, Ashley Novak, analyzed Hatfield's financial ratios compared to industry averages and found weaknesses. Novak will use this data to develop the financial plan section of Hatfield's strategic plan and determine how much new external capital is needed for a 10% sales growth in 2014.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    306 views3 pages

    AFN CH 12 Mini Case Study

    Uploaded by

    Muhammad Ali Samar
    Hatfield Medical Supplies brought in a new CEO and CFO to improve financial performance. The CFO, Ashley Novak, analyzed Hatfield's financial ratios compared to industry averages and found weaknesses. Novak will use this data to develop the financial plan section of Hatfield's strategic plan and determine how much new external capital is needed for a 10% sales growth in 2014.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Hatfield Medical Supplies provided financial statements and key ratios to be analyzed by the new CFO, Ashley Novak, to develop the company's strategic plan. Novak will compare Hatfield's ratios to industry averages to identify areas for improvement.

    Hatfield appears to be average or slightly below average compared to other firms. It has a lower ROA, ROE, times interest earned and profit margin. However, its receivables/sales and cash/sales ratios are better. Its primary weaknesses are lower profitability and higher debt levels based on the DuPont analysis.

    Using the AFN equation and assuming 2013 ratios remain the same, Hatfield's required new external capital for 2014 would be $200 million if sales grow 10%.

    Corporate Valuation and Financial Planning

    MINI CASE STUDY

    Hatfield Medical Supplies’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 Supplies (Millions of Dollars Except Per Share Data)


    Balance Sheet, 12/31/2013 Income Statement, Year Ending 2013
    Cash $ 20 Sales $2,000
    Accts. rec. 280 Op. costs (excl. depr.) 1,800
    Inventories 400 Depreciation 50
    Total CA $ 700 EBIT $ 150
    Net fixed assets 500 Interest 40
    $1,20
    Total assets 0 Pretax earnings $ 110
    Taxes (40%) 44
    Accts. pay. & accruals $ 80 Net income $ 66
    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 $6.60
    Retained earnings 200 DPS $2.00
    Total common equ. $620 Ending stock price $52.80
    $1,20
    Total liab. & equity 0
    Selected Additional Data for 2013
    Hatfiel Industr
    d y Hatfield Industry
    Total liability/Total
    Op. costs/Sales 90.0% 88.0% assets 48.3% 36.7%
    Depr./FA 10.0% 12.0% Times interest earned 3.8 8.9
    Cash/Sales 1.0% 1.0% Return on assets (ROA) 5.5% 10.2%
    Receivables/Sales 14.0% 11.0% Profit margin (M) 3.30% 4.99%
    Inventories/Sales 20.0% 15.0% Sales/Assets 1.67 2.04
    Fixed assets/Sales 25.0% 22.0% Assets/Equity 1.94 1.56
    Acc. pay. & accr. /
    Sales 4.0% 4.0% Return on equity (ROE) 10.6% 16.1%
    Tax rate 40.0% 40.0% 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%

    Note: Hatfield was operating at full capacity in 2013. Also, you may observe small differences in items like
    the ROE when calculated in different ways. Any such differences are due to rounding, and they can be
    ignored.

    a. Using Hatfield’s data and its industry averages, how well run would you say Hatfield appears
    to be in comparison with other firms in its industry? What are its primary strengths and
    weaknesses? Be specific in your answer, and point to various ratios that support your
    position. Also, use the Du Pont equation (see Chapter 3) as one part of your analysis.

    b. Use the AFN equation to estimate Hatfield’s required new external capital for 2014 if the sale
    growth rate is 10%. Assume that the firm’s 2013 ratios will remain the same in 2014. (Hint:
    Hatfield was operating at full capacity in 2013.)

    c. Define the term capital intensity. Explain how a decline in capital intensity would affect the
    AFN, other things held constant. Would economies of scale combined with rapid growth
    affect capital intensity, other things held constant? Also, explain how changes in each of the
    following would affect AFN, holding other things constant: the growth rate, the amount of
    accounts payable, the profit margin, and the payout ratio.
    d. 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?

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