I have a build a model for financial sheets for finance class and need in 8 hour
Fks96
exampleUpdated_Ch12MiniCase.xlsx1. Mini Case
| 11/21/18 | |||||||||||
| Chapter 12 Mini Case | |||||||||||
| 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) | ||||||||||
| 2018 | 2018 | ||||||||||
| Cash | $90 | Sales | $9,000.9 | ||||||||
| Accts. rec. | 1,260 | Op. costs (excl. depr.) | 8,100.9 | ||||||||
| Inventories | 1,440 | Depreciation | 360.0 | ||||||||
| Total CA | $2,790 | EBIT | $540.0 | ||||||||
| Net fixed assets | 3,600 | Interest | 144.0 | ||||||||
| Total assets | $6,390 | Pretax earnings | $396.0 | ||||||||
| Taxes (25%) | 99.0 | ||||||||||
| Accts. pay. & accruals | $1,620 | Net income | $297.0 | ||||||||
| Line of credit | 0 | ||||||||||
| Total CL | $1,620 | Dividends | $100 | ||||||||
| Long-term debt | 1,800 | Add. to RE | $197 | ||||||||
| Total liabilities | $3,420 | Common shares | 50 | ||||||||
| Common stock | 2,100 | EPS | $5.94 | ||||||||
| Retained earnings | 870 | DPS | $2.00 | ||||||||
| Total common equ. | $2,970 | Ending stock price | $41.00 | ||||||||
| Total liab. & equity | $6,390 | ||||||||||
| Selected Ratios, Calculations, and Other Data, 2018 | |||||||||||
| Operating Ratios and Data | Hatfield | Industry | Other Ratios | Hatfield | Industry | ||||||
| (Op. costs)/Sales | 90% | 88% | Profit margin (M) | 3.30% | 5.60% | ||||||
| Depr./FA | 10% | 12% | Return on assets (ROA) | 4.6% | 9.5% | ||||||
| Cash/Sales | 1% | 1% | Return on equity (ROE) | 10.0% | 15.1% | ||||||
| Receivables/Sales | 14% | 11% | Sales/Assets | 1.41 | 1.69 | ||||||
| Inventories/Sales | 16% | 15% | Asset/Equity | 2.15 | 1.59 | ||||||
| Fixed assets/Sales | 40% | 32% | Debt/TA | 28.2% | 16.9% | ||||||
| (Acc. pay. & accr.)/Sales | 18% | 12% | (Total liabilities)/(Total assets) | 53.5% | 37.3% | ||||||
| Tax rate | 25% | 25% | Times interest earned | 3.8 | 11.7 | ||||||
| Target WACC | 10% | 11% | P/E ratio | 6.9 | 16.0 | ||||||
| Interest rate on debt | 8% | 7% | OP ratio: NOPAT/Sales | 4.5% | 6.1% | ||||||
| CR ratio: (Total op. capital)/Sales | 53.0% | 47.0% | |||||||||
| ROIC | 8.5% | 13.0% | |||||||||
| 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 DuPont equation (see Chapter 3) as one part of your analysis. | |||||||||||
| Hatfield has lower operating profitability as shown by operating profitability (OP) ratio: 4.5% vs. 6.1%. Hatfield utilizes operating capital less efficiently, as shown by capital requirement (CR) ratio: 53% vs. 47%. As a consequence, Hatfield has a lower ROIC: 8.5% vs. 13%. In fact, Hatfield’s ROIC is less than its 10% WACC. | |||||||||||
| The debt/TA ratio and the TL/TA ratio indicate that Hatfield has more leverage than its industry competitors. The combination of higher interest payments and lower operating profitability cause Hatfield's times interest earned ratio to be much lower than the industry average. | |||||||||||
| Du Pont ROE | M x | Sales/Assets | x | Assets/Equity | = | ROE | |||||
| Hatfield | 3.30% | 1.41 | 2.15 | = | 10.0% | ||||||
| Industry | 5.60% | 1.69 | 1.59 | = | 15.1% | ||||||
| The DuPont analysis confirms the conclusions. | |||||||||||
| b. Use the AFN equation to estimate Hatfield’s required new external capital for 2019 if the sale growth rate is 11.1%. Assume that the firm’s 2018 ratios will remain the same in 2019. (Hint: Hatfield was operating at full capacity in 2018.) | |||||||||||
| Data for AFN Method | |||||||||||
| Growth rate in sales (g) | 11.1% | ||||||||||
| Sales (S0) | $9,001 | ||||||||||
| Required assets (A0*) | $6,390 | ||||||||||
| Spontaneous liabilities (L0*) | $1,620 | ||||||||||
| Forecasted sales (S1) | $10,000 | ||||||||||
| Increase in sales (ΔS = gS0) | $999 | ||||||||||
| Profit margin (M) | 3.30% | ||||||||||
| Assets/Sales (A0*/S0) | 71.0% | ||||||||||
| Payout ratio (POR) | 33.7% | ||||||||||
| Spont. Liab./Sales (L0*/S0) | 18.0% | ||||||||||
| AFNHatfield = | Required increase in assets | − | Increase in spontaneous liabilities | − | Increase in retained earnings | ||||||
| = | (A0*/S0)∆S | − | (L0*/S0)∆S | − | M ×S1 × (1–POR) | ||||||
| = | (0.7099)(999.1) | − | (0.18)(999.1) | − | (0.033)(10000)(0.6633) | ||||||
| = | $709.3 | − | $179.8 | − | $218.9 | ||||||
| AFNHatfield = | $310.60 | million | |||||||||
| 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. Answer: See PowerPoint Show | |||||||||||
| 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? Answer: See PowerPoint Show | |||||||||||
| Self-Supporting Growth Rate. This is the maximum growth rate that can be attained without raising external funds, i.e., the value of g that forces AFN = 0, holding other things constant. We found this rate, ith Excel's Goal Seek function and also algebraically, as explained below. | |||||||||||
| 1. Using algebra. The self-supporting growth rate can also be found by setting the AFN equation to zero and then solving for g. | |||||||||||
| M(1 – POR)(S0) | |||||||||||
| Self-Supporting g = | = ─────────────────────── | ||||||||||
| A0* – L0* – M(1 – POR)S0 | |||||||||||
| M = | 3.30% | 3 | 3.300% | ||||||||
| POR = | 33.7% | 3 | 33.700% | ||||||||
| 1-POR = | 66.3% | 66.300% | |||||||||
| S0 = | $9,000.9 | 0 | $9,001.0 | ||||||||
| A* = | $6,390 | 0 | $6,390.0 | ||||||||
| L* = | $1,620 | 0 | $1,620.0 | ||||||||
| M(1 – POR)(S0) | $197.00 | ||||||||||
| Self-Supporting g | = ─────────────────── | = | ──────── | = | 4.3% | ||||||
| A0* – L0* – M(1 – POR)S0 | $4,573.00 | ||||||||||
| 2. Using Goal Seek. To find the self-supporting growth rate with Goal Seek, select Data, What-If Analysis, and Goal Seek; then choose cell with the AFN (B96) as the value for the "Set Cell" area of the Goal Seek dialog box, choose 0 as the value for the "To Value" area of the dialog box, and choose the cell with the growth rate (C54) as the value for the "By Changing Cell" area of the dialog box. Then hit OK. | |||||||||||
| e. Use the following assumptions to answer the questions below: (1) Operating ratios remain unchanged. (2) Sales will grow by 11.1%, 8%, 5%, and 5% for the next four years. (3) The target weighted average cost of capital (WACC) is 10%. This is the No Change scenario because operations remain unchanged. | |||||||||||
| Inputs for the forecast are shown below. You can change inputs in blue. You can show the original scenario by going to Data, What-If Analysis, Scenario Manager, and select the scenario named No Change. | |||||||||||
| Scenario: | |||||||||||
| No Change | |||||||||||
| Actual | Forecast | For inputs: Mike Ehrhardt: The last 2 years of growth must have same value to get constant growth in FCF. The last 3 years of the operating ratios must have same value to get constant growth in FCF. An error message will appear if this condition is violated. |
|||||||||
| Inputs | 2018 | 2019 | 2020 | 2021 | 2022 | Error Check | |||||
| Sales growth rate: | 11.1% | 8% | 5% | 5% | Ok | ||||||
| (Op. costs)/Sales: | 90.00% | 90.0% | 90% | 90% | 90% | Ok | |||||
| Depr./FA | 10.00% | 10% | 10% | 10% | 10% | Ok | |||||
| Cash/Sales: | 1.00% | 1% | 1% | 1% | 1% | Ok | |||||
| (Acct. rec.)/Sales | 14.00% | 14% | 14% | 14% | 14% | Ok | |||||
| Inv./Sales: | 16.00% | 16% | 16% | 16% | 16% | Ok | |||||
| FA/Sales: | 40.00% | 40% | 40% | 40% | 40% | Ok | |||||
| (AP & accr.)/ Sales: | 18.00% | 18% | 18% | 18% | 18% | Ok | |||||
| Tax rate: | 25.00% | 25% | 25% | 25% | 25% | Ok | |||||
| Rate on all debt | 8% | 8% | 8% | 8% | |||||||
| Div. growth rate: | 5.00% | 10% | 8% | 5% | 5% | ||||||
| Target WACC | 10% | 10% | 10% | 10% | |||||||
| e. (1) For each of the next four years, forecast the following items: sales, cash, accounts receivable, inventories, net fixed assets, accounts payable & accruals, operating costs (excluding depreciation), depreciation, and earnings before interest and taxes (EBIT). | |||||||||||
| Scenario: | |||||||||||
| No Change | |||||||||||
| Actual | Forecast | ||||||||||
| 2018 | 2019 | 2020 | 2021 | 2022 | |||||||
| Net sales | $9,000.9 | $10,000 | $10,800 | $11,340 | $11,907 | ||||||
| Op. costs (excl. depr.) | $8,100.9 | $9,000 | $9,720 | $10,206 | $10,716 | ||||||
| Depreciation | $360.0 | $400 | $432 | $454 | $476 | ||||||
| EBIT | $540.0 | $600 | $648 | $680 | $714 | ||||||
| Cash | $90.0 | $100 | $108 | $113 | $119 | ||||||
| Accounts receivable | $1,260.0 | $1,400 | $1,512 | $1,588 | $1,667 | ||||||
| Inventories | $1,440.0 | $1,600 | $1,728 | $1,814 | $1,905 | ||||||
| Net fixed assets | $3,600.0 | $4,000 | $4,320 | $4,536 | $4,763 | ||||||
| Accts. pay. & accruals | $1,620.0 | $1,800 | $1,944 | $2,041 | $2,143 | ||||||
| e. (2) Using the previously forecasted items, calculate for each of the next four years the net operating profit after taxes (NOPAT), net operating working capital, total operating capital, free cash flow, (FCF), annual growth rate in FCF, and return on invested capital. What does the forecasted free cash flow in the first year imply about the need for external financing? Compare the forecasted ROIC compare with the WACC. What does this imply about how well the company is performing? | |||||||||||
| Scenario: | Actual | Forecast | |||||||||
| No Change | 2018 | 2019 | 2020 | 2021 | 2022 | Definitions: | |||||
| NOPAT | $405 | $450 | $486 | $510 | $536 | NOPAT = EBIT(1-T) | |||||
| NOWC | $1,170 | $1,300 | $1,404 | $1,474 | $1,548 | NOWC = (Cash + accounts receivable + inventories) − (Accounts payable & accruals) | |||||
| Total op. capital | $4,770 | $5,300 | $5,724 | $6,010 | $6,311 | Total operating capital = NOWC + Net fixed assets | |||||
| FCF | −$80 | $62 | $224 | $235.30 | FCF = NOPAT − Change in total operating capital | ||||||
| Growth in FCF | -177.5% | 261.5% | 5.0% | ||||||||
| ROIC | 8.5% | 8.5% | 8.5% | 8.5% | 8.5% | ROIC = NOPAT/Total operating capital | |||||
| e. (3) Assume that FCF will continue to grow at the growth rate for the last year in the forecast horizon (Hint: 5%). What is the horizon value at 2022? What is the present value of the horizon value? What is the present value of the forecasted FCF? (Hint: use the free cash flows for 2019 through 2022). What is the current value of operations? Using information from the 2018 financial statements, what is the current estimated intrinsic stock price? | |||||||||||
| Scenario: | |||||||||||
| No Change | |||||||||||
| Horizon Value: | Value of operations | $3,683 | |||||||||
| + ST investments | $0 | ||||||||||
| $4,941 | Estimated total intrinsic value | $3,683 | |||||||||
| − All debt | $1,800 | ||||||||||
| Value of Operations: | − Preferred stock | $0 | |||||||||
| Present value of HV | $3,375 | Estimated intrinsic value of equity | $1,883 | ||||||||
| + Present value of FCF | $308 | ÷ Number of shares | $50 | ||||||||
| Value of operations = | $3,683 | Estimated intrinsic stock price = | $37.65 | ||||||||
| f. Continue with the same assumptions for the No Change scenario from the previous question, but now forecast the balance sheet and income statements for 2019 (but not for the following three years) using the following preliminary financial policy. (1) Regular dividends will grow by 10%. (2) No additional long-term debt or common stock will be issued. (3) The interest rate on all debt is 8%. (4) Interest expense for long-term debt is based on the average balance during the year. (5) If the operating results and the preliminary financing plan cause a financing deficit, eliminate the deficit by drawing on a line of credit. The line of credit would be tapped on the last day of the year, so it would create no additional interest expenses for that year. (6) If there is a financing surplus, eliminate it by paying a special dividend. After forecasting the 2019 financial statements, answer the following questions. | |||||||||||
| Values, Not Live | |||||||||||
| No Change | No Change | ||||||||||
| 1. Balance Sheets | Most Recent | Forecast | Note: see to right for the "No Change" financial statements with fixed values and not variables. | 1. Balance Sheets | Most Recent | Forecast | |||||
| 2018 | Input | Basis for 2019 Forecast | 2019 | 2019 | Input | Basis for 2020 Forecast | 2020 | ||||
| Assets | Assets | ||||||||||
| Cash | $ 90 | 1.00% | × 2019 Sales | $ 100 | Cash | $90.0 | 1.00% | × 2020 Sales | $100.00 | ||
| Accts. rec. | 1,260 | 14.00% | × 2019 Sales | 1,400 | Accts. rec. | 1,260.0 | 14.00% | × 2020 Sales | $1,400.00 | ||
| Inventories | 1,440 | 16.00% | × 2019 Sales | 1,600 | Inventories | 1,440.0 | 16.00% | × 2020 Sales | $1,600.00 | ||
| Total CA | $ 2,790 | $ 3,100 | Total CA | $2,790.0 | $3,100.00 | ||||||
| Net fixed assets | 3,600 | 40.00% | × 2019 Sales | 4,000 | Net fixed assets | 3,600.0 | 40.00% | × 2020 Sales | $4,000.00 | ||
| Total assets | $ 6,390 | $ 7,100 | Total assets | $6,390.0 | $7,100.00 | ||||||
| Liabilities and equity | Liabilities and equity | ||||||||||
| Accts. pay. & accruals | $ 1,620 | 18.00% | × 2019 Sales | $ 1,800 | Accts. pay. & accruals | $1,620.0 | 18.00% | × 2020 Sales | $1,800.00 | ||
| Line of credit | - | Draw on LOC if financing deficit | 298 | Line of credit | 0.0 | Draw on LOC if financing deficit | $298.00 | ||||
| Total CL | $ 1,620 | $ 2,098 | Total CL | $1,620.0 | $2,098.00 | ||||||
| Long-term debt | 1,800 | Carry over from previous year | 1,800 | Long-term debt | 1,800.0 | Carry over from previous year | $1,800.00 | ||||
| Total liabilities | $ 3,420 | $ 3,898 | Total liabilities | $3,420.0 | $3,898.00 | ||||||
| Common stock | $ 2,100 | Carry over from previous year | 2,100 | Common stock | 2,100.0 | Carry over from previous year | $2,100.00 | ||||
| Retained earnings | 870 | Old RE + Add. to RE | 1,102 | Retained earnings | 870.0 | Old RE + Add. to RE | $1,102 | ||||
| Total common equity | $ 2,970 | $ 3,202 | Total common equity | $2,970.0 | $3,202 | ||||||
| Total liabs. & equity | $ 6,390 | $ 7,100 | Total liabs. & equity | $6,390.0 | $7,100 | ||||||
| Check: TA − Total Liab. & Eq. = | $0 | Check: TA − Total Liab. & Eq. = | $0.00 | ||||||||
| 2. Income Statement | Most Recent | Forecast | 2. Income Statement | Most Recent | Forecast | ||||||
| 2018 | Input | Basis for 2019 Forecast | 2019 | 2019 | Input | Basis for 2020 Forecast | 2020 | ||||
| Sales | $ 9,000.9 | 1.111 | × 2018 Sales | $ 10,000 | Sales | $9,000.9 | 111.1% | × 2019 Sales | $10,000.00 | ||
| Op. costs (excl. depr.) | 8,101 | 90.00% | × 2019 Sales | 9,000 | Op. costs (excl. depr.) | 8,100.9 | 90.00% | × 2020 Sales | $9,000.00 | ||
| Depreciation | 360 | 10.00% | × 2019 Net fixed assets | 400 | Depreciation | 360.0 | 10.00% | × 2020 Net fixed assets | $400.00 | ||
| EBIT | $ 540.0 | $ 600 | EBIT | $540.0 | $600.00 | ||||||
| Less: Interest on LTD | 144 | 8.00% | × Avg bonds | 144 | Less: Interest on LTD | 144.0 | 8.00% | × Avg bonds | $144.00 | ||
| Interest on LOC | - | 8.00% | × Beginning LOC | - | Note: | If there is an initial balance on the on the LOC, the assumption is that the balance will not change until the last day of the year. Therefore, the interest for the year is the based only on the beginning balance. | Interest on LOC | 0.0 | 8.00% | × Beginning LOC | $0.00 |
| Pretax earnings | $ 396.0 | $ 456 | Pretax earnings | $396.0 | $456.00 | ||||||
| Taxes (25%) | 99 | 25.00% | × Pretax earnings | 114 | Taxes (25%) | 99.0 | 25.00% | × Pretax earnings | $114.00 | ||
| Net income | $ 297.0 | $ 342 | Net income | $297.0 | $342.00 | ||||||
| Regular common dividends | $100 | 110% | × 2018 Dividends | $110 | Regular common dividends | $100.0 | 110% | × 2019 Dividends | $110.00 | ||
| Special dividends | $0 | Pay if financing surplus | $0 | Special dividends | $0.0 | Pay if financing surplus | $0.00 | ||||
| Addition to RE | $197 | Net income – Dividends | $232 | Addition to RE | $197.0 | Net income – Dividends | $232.00 | ||||
| 3. Elimination of the Financial Deficit or Surplus | 3. Elimination of the Financial Deficit or Surplus | ||||||||||
| Increase in spontaneous liabilities (accounts payable and accruals) | $180 | Increase in spontaneous liabilities (accounts payable and accruals) | $180.00 | ||||||||
| + Increase in long-term debt and common stock | $0 | Note: | If there is a LOC in the previous year, then it is necessary to subtract the previous year's line of credit. In other words, this is like paying off the old line of credit on the last day of the year and then drawing on a new line of credit. | + Increase in long-term debt and common stock | $0.00 | ||||||
| − Previous line of credit | $0 | − Previous line of credit | $0.00 | ||||||||
| + Net income minus regular common dividends | $232 | + Net income minus regular common dividends | $232.00 | ||||||||
| Increase in financing | $412 | Increase in financing | $412.00 | ||||||||
| − Increase in total assets | $710 | − Increase in total assets | $710.00 | ||||||||
| Amount of deficit or surplus financing: | −$298 | Amount of deficit or surplus financing: | −$298.00 | ||||||||
| If deficit in financing (negative), draw on line of credit | Line of credit | $298 | If deficit in financing (negative), draw on line of credit | Line of credit | $298.00 | ||||||
| If surplus in financing (positive), pay special dividend | Special dividend | $0 | If surplus in financing (positive), pay special dividend | Special dividend | $0.00 | ||||||
| g. Repeat the analysis performed in the previous question, but now assume that Hatfield is able to improve the following inputs: (1) Reduce operating costs (excluding depreciation) to sales to 89.4% at a cost of $40 million. (2) Reduce inventories/sales to 14% at a cost of $10 million. (3) Reduce net fixed assets/sales to 38% at a cost of $20 million. This is the Improve scenario. | |||||||||||
| Go to Scenario Manager and choose the Improve Scenario. This will update the financial statements shown above. They are copied below as values. | |||||||||||
| Values, Not Live | |||||||||||
| Improvements | |||||||||||
| 1. Balance Sheets | Most Recent | Forecast | |||||||||
| 2018 | Input | Basis for 2019 Forecast | 2019 | ||||||||
| Assets | |||||||||||
| Cash | $90 | 1.00% | × 2019 Sales | $100 | |||||||
| Accts. rec. | $1,260 | 14.00% | × 2019 Sales | $1,400 | |||||||
| Inventories | $1,440 | 14.00% | × 2019 Sales | $1,400 | |||||||
| Total CA | $2,790 | $2,900 | |||||||||
| Net fixed assets | $3,600 | 38.00% | × 2019 Sales | $3,800 | |||||||
| Total assets | $6,390 | $6,700 | |||||||||
| Liabilities and equity | |||||||||||
| Accts. pay. & accruals | $1,620 | 18.00% | × 2019 Sales | $1,800 | |||||||
| Line of credit | $0 | Draw on LOC if financing deficit | $0 | ||||||||
| Total CL | $1,620 | $1,800 | |||||||||
| Long-term debt | $1,800 | Carry over from previous year | $1,800 | ||||||||
| Total liabilities | $3,420 | $3,600 | |||||||||
| Common stock | $2,100 | Carry over from previous year | $2,100 | ||||||||
| Retained earnings | $870 | Old RE + Add. to RE | $1,000 | ||||||||
| Total common equity | $2,970 | $3,100 | |||||||||
| Total liabs. & equity | $6,390 | $6,700 | |||||||||
| Check: TA − Total Liab. & Eq. = | $0 | ||||||||||
| 2. Income Statement | Most Recent | Forecast | |||||||||
| 2018 | Input | Basis for 2019 Forecast | 2019 | ||||||||
| Sales | $9,000.9 | 111.1% | × 2018 Sales | $10,000 | |||||||
| Op. costs (excl. depr.) | 8,100.9 | 89.40% | × 2019 Sales | $8,940 | |||||||
| Depreciation | 360.0 | 10.00% | × 20219Net fixed assets | $380 | |||||||
| EBIT | $540.0 | $680 | |||||||||
| Less: Interest on LTD | 144.0 | 8.00% | × Avg bonds | $144 | |||||||
| Interest on LOC | 0.0 | 8.00% | × Beginning LOC | $0 | |||||||
| Pretax earnings | $396.0 | $536 | |||||||||
| Taxes (25%) | 99.0 | 25.00% | × Pretax earnings | $134 | |||||||
| Net income | $297.0 | $402 | |||||||||
| Regular common dividends | $100.0 | 110% | × 2018 Dividends | $110 | |||||||
| Special dividends | $0.0 | Pay if financing surplus | $162 | ||||||||
| Addition to RE | $197.0 | Net income – Dividends | $130 | ||||||||
| 3. Elimination of the Financial Deficit or Surplus | |||||||||||
| Increase in spontaneous liabilities (accounts payable and accruals) | $180 | ||||||||||
| + Increase in long-term debt and common stock | $0 | ||||||||||
| − Previous line of credit | $0 | ||||||||||
| + Net income minus regular common dividends | $292 | ||||||||||
| Increase in financing | $472 | ||||||||||
| − Increase in total assets | $310 | ||||||||||
| Amount of deficit or surplus financing: | $162 | ||||||||||
| If deficit in financing (negative), draw on line of credit | Line of credit | $0 | |||||||||
| If surplus in financing (positive), pay special dividend | Special dividend | $162 | |||||||||
| g. (1) | Should Hatfield implement the plans? How much value would they add to the company? | ||||||||||
| Improve | No Change | Net Change in Value | |||||||||
| Value of operations | $5,662 | $3,683 | $1,980 | ||||||||
| Cost of Improvement | -$70 | -$70 | |||||||||
| Total value | $5,592 | $3,683 | $1,910 | ||||||||
| g. (2) | How much can Hatfield pay as a special dividend in the Improve Scenario? What else might Hatfield do with the financing surplus? | ||||||||||
| Special dividend = | $162 |
