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.) Selected Additional Data for 2019Chapter 12 Corporate Valuation and Financial Planning535Hatfield Industry(Op. costs)/SalesDepr./FACash/SalesReceivables/SalesInventories/SalesFixed assets/Sales(Acc. pay. & accr.)/Sales90%88%Hatfield IndustryProfit margin (M)Return on assets (ROA)Return on equity (ROE)Sales/Assets10%12%3.30%5.60%1%1%4.6%9.5%14%11%10.0%15.1%16%15%32%18% 12%1.411.69Asset/EquityDebt/TA40%2.151.5928.2%16.9%25% 25%10% 11%(Total liabilities)/(Total assets)Times interest earned53.5%37.3%Tax rateTarget WACCInterest rate on debt3.811.7P/E ratio8%7%6.716.0OP ratio: NOPAT/SalesCR ratio: (Total op. capital)/SalesROIC4.5%6.1%53.0%47.0%8.5%13.0%a. Using Hatfield's data and its industry averages, how well run would you say Hatfieldappears to be in comparison with other firms in its industry? What are its primarystrengths and weaknesses? Be specific in your answer and point to various ratiosthatsupport your position. Also, use the DuPont equation (see Chapter 3) as onepart of your analysis.b. Use the AFN equation to estimate Hatfield's required new external capital for 2020if the sales growth rate is 11.1%. Assume that the firm's 2019 ratios will remain thesame in 2020. (Hint: Hatfield was operating at full capacity in 2019.)c. Define the term capital intensity. Explain how a decline in capital intensity wouldluowulezbum wol affect the AFN, other things held constant. Would economies of scale combinedwith rapid growth affect capital intensity, other things held constant? Also, explainhow changes in each of the following would affect AFN, holding other things con-on stant: the growth rate, the amount of accounts payable, the profit margin, and thepayout ratio.d. Define the term self-supporting growth rate. What is Hatfield's self-supportinggrowth rate? Would the self-supporting growth rate be affected by a change in thecapital intensity ratio or the other factors mentioned in the previous question? Otherthings held constant, would the calculated capital intensity ratio change over timeif the company were growing and were also subject to economies of scale and/orlumpy assets?e. Use the following assumptions to answer the following questions: (1) Operatingratios remain unchanged. (2) Sales will grow by 11.1%, 8%, 5%, and 5% for the next4 years. (3) The target weighted average cost of capital (WACC) is 10%. This is theNo Change scenario because operations remain unchanged.(1) For each of the next 4 years, forecast the following items: sales, cash, accountsreceivable, inventories, net fixed assets, accounts payable and accruals, operat-ing costs (excluding depreciation), depreciation, and earnings before interest andtaxes (EBIT).(2) Using the previously forecasted items, calculate for each of the next 4 years thenet operating profit after taxes (NOPAT), net operating working capital, totaloperating capital, free cash flow (FCF), annual growth rate in FCF, and returnon invested capital. What does the forecasted free cash flow in the first vearimply about the need for external financing? Compare the forecasted ROIC withthe WACC. What does this imply about how well the company is performing?year(3) Assume that FCF will continue to grow at the growth rate for the last in theforecast horizon. (Hint: g, = 5%.) What is the horizon value at 2023? What is the%3D c. Calculate the return on invested capital (ROIC = NOPAT/[Total net operatinggrowth rate in FCF in the last forecast period because all ratios are constant)? Doe. Calculate the intrinsic price per share of common equity as of December 31, 2019.you think that Hensley's value would increase if it could add growth without reduc-to the growth rate at the horizon.) How does the current value of operations com-you think that the company will have a value of operations greater than its total netcapital]) and the growth rate in free cash flow. What is the ROIC in the last year ofthe forecast? What is the long-term constant growth rate in free cash flow (g, is thed. Calculate the current value of operations. (Hint: First calculate the horizon value ating its ROIC? (Hint: Growth will add value if the ROIC WACC/[1 + WACC]). Dothe end of the forecast period, which is equal to the value of operations at the end ofHatfield Medical Supply's stock price had been lagging its industry averages, so its boardthe forecast period. Assume that the annual growth rate beyond the horizon is equalPart 5 Corporate Valuation and GovernanceGovernance534%3DSeifi(Ор. сDepr.Cash.youayouReceioperating capital? (Hint: Is ROIC WACC/[1 + g,]?)InverFixec(AccТахto the growth rate at the horizon.) How does the current value of operatiopare with the current amount of total net operating capital?TargIntercom-MINI CASEof directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak.afinance MBA who had been working for a consulting company, to replace the old CFOand Lee asked Novak to develop the financial planning section of the strategic plan. Inher previous job, Novak's primary task had been to help clients develop financial fore-casts, and that was one reason Lee hired her.Novak began by comparing Hatfield's financial ratios to the industry averages. If anvratio was substandard, she discussed it with the responsible manager to see what couldbe done to improve the situation. The following data show Hatfield's latest financialstatements plus some ratios and other data that Novak plans to use in her analysis.Hatfield Medical Supply (Millions of Dollars, Except per Share Data)Balance Sheet, 12/31/2019Income Statement, Year Ending 2019Cash0 Accounts receivable$ 901,260SalesOp costs (excl. depr.)$9,000.98,100.9Inventories1,440$2,790DepreciationEBIT360.0$ 540.0Total CANet fixed assets3,600Interest144.0Total assets$6,390Pre-tax earnings$ 396.0Taxes (25%)99.0Accts. pay. & accruals$1,620Line of creditNet income$297.00.Total CL$1,620Long-term debtAdditional Information1,800Total liabilitiesDividends2$100$3,420Common stockAdditions to RE$197Retained earnings2,100Common sharesTotal common equity870EPS$ 5.94Total liab. & equity$2,970DPS$ 200$6,390Ending stock price$ 40.0050

Question

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.) Selected Additional Data for 2019Chapter 12 Corporate Valuation and Financial Planning535Hatfield Industry(Op. costs)/SalesDepr./FACash/SalesReceivables/SalesInventories/SalesFixed assets/Sales(Acc. pay. & accr.)/Sales90%88%Hatfield IndustryProfit margin (M)Return on assets (ROA)Return on equity (ROE)Sales/Assets10%12%3.30%5.60%1%1%4.6%9.5%14%11%10.0%15.1%16%15%32%18% 12%1.411.69Asset/EquityDebt/TA40%2.151.5928.2%16.9%25% 25%10% 11%(Total liabilities)/(Total assets)Times interest earned53.5%37.3%Tax rateTarget WACCInterest rate on debt3.811.7P/E ratio8%7%6.716.0OP ratio: NOPAT/SalesCR ratio: (Total op. capital)/SalesROIC4.5%6.1%53.0%47.0%8.5%13.0%a. Using Hatfield's data and its industry averages, how well run would you say Hatfieldappears to be in comparison with other firms in its industry? What are its primarystrengths and weaknesses? Be specific in your answer and point to various ratiosthatsupport your position. Also, use the DuPont equation (see Chapter 3) as onepart of your analysis.b. Use the AFN equation to estimate Hatfield's required new external capital for 2020if the sales growth rate is 11.1%. Assume that the firm's 2019 ratios will remain thesame in 2020. (Hint: Hatfield was operating at full capacity in 2019.)c. Define the term capital intensity. Explain how a decline in capital intensity wouldluowulezbum wol affect the AFN, other things held constant. Would economies of scale combinedwith rapid growth affect capital intensity, other things held constant? Also, explainhow changes in each of the following would affect AFN, holding other things con-on stant: the growth rate, the amount of accounts payable, the profit margin, and thepayout ratio.d. Define the term self-supporting growth rate. What is Hatfield's self-supportinggrowth rate? Would the self-supporting growth rate be affected by a change in thecapital intensity ratio or the other factors mentioned in the previous question? Otherthings held constant, would the calculated capital intensity ratio change over timeif the company were growing and were also subject to economies of scale and/orlumpy assets?e. Use the following assumptions to answer the following questions: (1) Operatingratios remain unchanged. (2) Sales will grow by 11.1%, 8%, 5%, and 5% for the next4 years. (3) The target weighted average cost of capital (WACC) is 10%. This is theNo Change scenario because operations remain unchanged.(1) For each of the next 4 years, forecast the following items: sales, cash, accountsreceivable, inventories, net fixed assets, accounts payable and accruals, operat-ing costs (excluding depreciation), depreciation, and earnings before interest andtaxes (EBIT).(2) Using the previously forecasted items, calculate for each of the next 4 years thenet operating profit after taxes (NOPAT), net operating working capital, totaloperating capital, free cash flow (FCF), annual growth rate in FCF, and returnon invested capital. What does the forecasted free cash flow in the first vearimply about the need for external financing? Compare the forecasted ROIC withthe WACC. What does this imply about how well the company is performing?year(3) Assume that FCF will continue to grow at the growth rate for the last in theforecast horizon. (Hint: g, = 5%.) What is the horizon value at 2023? What is the%3D c. Calculate the return on invested capital (ROIC = NOPAT/[Total net operatinggrowth rate in FCF in the last forecast period because all ratios are constant)? Doe. Calculate the intrinsic price per share of common equity as of December 31, 2019.you think that Hensley's value would increase if it could add growth without reduc-to the growth rate at the horizon.) How does the current value of operations com-you think that the company will have a value of operations greater than its total netcapital]) and the growth rate in free cash flow. What is the ROIC in the last year ofthe forecast? What is the long-term constant growth rate in free cash flow (g, is thed. Calculate the current value of operations. (Hint: First calculate the horizon value ating its ROIC? (Hint: Growth will add value if the ROIC > WACC/[1 + WACC]). Dothe end of the forecast period, which is equal to the value of operations at the end ofHatfield Medical Supply's stock price had been lagging its industry averages, so its boardthe forecast period. Assume that the annual growth rate beyond the horizon is equalPart 5 Corporate Valuation and GovernanceGovernance534%3DSeifi(Ор. сDepr.Cash.youayouReceioperating capital? (Hint: Is ROIC> WACC/[1 + g,]?)InverFixec(AccТахto the growth rate at the horizon.) How does the current value of operatiopare with the current amount of total net operating capital?TargIntercom-MINI CASEof directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak.afinance MBA who had been working for a consulting company, to replace the old CFOand Lee asked Novak to develop the financial planning section of the strategic plan. Inher previous job, Novak's primary task had been to help clients develop financial fore-casts, and that was one reason Lee hired her.Novak began by comparing Hatfield's financial ratios to the industry averages. If anvratio was substandard, she discussed it with the responsible manager to see what couldbe done to improve the situation. The following data show Hatfield's latest financialstatements plus some ratios and other data that Novak plans to use in her analysis.Hatfield Medical Supply (Millions of Dollars, Except per Share Data)Balance Sheet, 12/31/2019Income Statement, Year Ending 2019Cash0 Accounts receivable$ 901,260SalesOp costs (excl. depr.)$9,000.98,100.9Inventories1,440$2,790DepreciationEBIT360.0$ 540.0Total CANet fixed assets3,600Interest144.0Total assets$6,390Pre-tax earnings$ 396.0Taxes (25%)99.0Accts. pay. & accruals$1,620Line of creditNet income$297.00.Total CL$1,620Long-term debtAdditional Information1,800Total liabilitiesDividends2$100$3,420Common stockAdditions to RE$197Retained earnings2,100Common sharesTotal common equity870EPS$ 5.94Total liab. & equity$2,970DPS$ 200$6,390Ending stock price$ 40.0050

Accepted Answer

Additional Fund Need or also known as External financing can be calculated using the below formula:…