Hatfield Medical Suppliess 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, Novaks 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 Hatfields 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 Hatfields latest financial statements plus some ratios and other data that Novak plans to use in her analysis. Hatfield Medical Supplies: Balance Sheet (Millions of Dollars), 12/31/2013 Hatfield Medical Supplies: Income Statement (Millions of Dollars Except per Share) 2013 Cash $20 Sales $2,000.0 Accts. rec. $280 Op. costs (excl. depr.) $1,800.0 Inventories $400 Depreciation $50.0 Total CA $700 EBIT $150.0 Net fixed assets $500 Interest $40.0 Total assets $1,200 Pretax earnings $110.0 Taxes (40%) $44.0 Accts. pay. & accruals $80 Net income $66.0 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 $6.6 Retained earnings $200 DPS $2.0 Total common equ. $620 Ending stock price $52.80 Total liab. & equity $1,200 Selected Ratios and Other Data, 2013 Hatfield Industry Hatfield Industry Op. costs/Sales 90% 88% Total liability/Total assets 48.3% 36.7% Depr./FA 10% 12% Times interest earned 3.8 8.9 Cash/Sales 1% 1% Return on assets (ROA) 5.5% 10.2% Receivables/Sales 14% 11% Profit margin (M) 3.30% 4.99% Inventories/Sales 20% 15% Sales/Assets 1.67 2.04 Fixed assets/Sales 25% 22% Assets/Equity 1.94 1.58 Acc. pay. & accr. / Sales 4% 4% Return on equity (ROE) 10.6% 16.1% Tax rate 40% 40% 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% Additional Data 2014 Exp. Saled growth rate 10% Interest rate on LT debt 8% Target WACC 9% Question A: Using Hatfields data and its industry averages, how well run would you say Hatfield appears to be compared to 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 Point equation. Question 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. Question E: Using the following assumptions t.

1. Hatfield Medical Suppliess 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, Novaks
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 Hatfields 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 Hatfields latest financial statements plus
some ratios and other data that Novak plans to use in her analysis.
Hatfield Medical Supplies: Balance Sheet (Millions of Dollars), 12/31/2013
Hatfield Medical Supplies: Income Statement (Millions of Dollars Except per Share)
2013
Cash
$20
Sales
$2,000.0
Accts. rec.
$280
Op. costs (excl. depr.)
$1,800.0
Inventories
$400
Depreciation
$50.0
Total CA
$700
EBIT
$150.0
Net fixed assets
$500
Interest
$40.0
Total assets
$1,200

2. Pretax earnings
$110.0
Taxes (40%)
$44.0
Accts. pay. & accruals
$80
Net income
$66.0
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
$6.6
Retained earnings
$200
DPS
$2.0
Total common equ.
$620
Ending stock price
$52.80
Total liab. & equity
$1,200

3. Selected Ratios and Other Data, 2013
Hatfield
Industry
Hatfield
Industry
Op. costs/Sales
90%
88%
Total liability/Total assets
48.3%
36.7%
Depr./FA
10%
12%
Times interest earned
3.8
8.9
Cash/Sales
1%
1%
Return on assets (ROA)
5.5%
10.2%
Receivables/Sales
14%
11%
Profit margin (M)
3.30%
4.99%
Inventories/Sales
20%
15%
Sales/Assets
1.67
2.04
Fixed assets/Sales

4. 25%
22%
Assets/Equity
1.94
1.58
Acc. pay. & accr. / Sales
4%
4%
Return on equity (ROE)
10.6%
16.1%
Tax rate
40%
40%
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%
Additional Data
2014
Exp. Saled growth rate
10%
Interest rate on LT debt
8%
Target WACC
9%
Question A: Using Hatfields data and its industry averages, how well run would you say Hatfield
appears to be compared to other firms in its industry? What are its primary strengths and

5. weaknesses? Be specific in your answer, and point to various ratios that support your position.
Also, use the Du Point equation.
Question 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.
Question E: Using the following assumptions to answer the questions below: (1) Operating ratios
remain unchanged. (2) Sales will grow by 10%, 8%, 5%, and 5% for the next four years. (3) The
target weighted average cost of capital (WACC) is 9%. This is the No Change scenario because
operations remain unchanged.
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, depreciation, and
earnings before interest and taxes.
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?
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 2017? 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 2014
through 2017). What is the current value of operations? Using information from the 2013
financial statements, what is the current estimated intrinsic stock price?
Hatfield Medical Suppliess 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, Novaks
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 Hatfields 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 Hatfields latest financial statements
plus some ratios and other data that Novak plans to use in her analysis.
Hatfield Medical Supplies: Balance Sheet (Millions of Dollars), 12/31/2013

6. Hatfield Medical Supplies: Income Statement (Millions of Dollars Except per Share)
2013
Cash
$20
Sales
$2,000.0
Accts. rec.
$280
Op. costs (excl. depr.)
$1,800.0
Inventories
$400
Depreciation
$50.0
Total CA
$700
EBIT
$150.0
Net fixed assets
$500
Interest
$40.0
Total assets
$1,200
Pretax earnings
$110.0
Taxes (40%)
$44.0
Accts. pay. & accruals
$80
Net income
$66.0
Line of credit
$0
Total CL
$80

7. Dividends
$20.0
Long-term debt
$500
Add. to RE
$46.0
Total liabilities
$580
Common shares
10.0
Common stock
$420
EPS
$6.6
Retained earnings
$200
DPS
$2.0
Total common equ.
$620
Ending stock price
$52.80
Total liab. & equity
$1,200
Selected Ratios and Other Data, 2013
Hatfield
Industry
Hatfield
Industry
Op. costs/Sales
90%
88%
Total liability/Total assets
48.3%
36.7%
Depr./FA

8. 10%
12%
Times interest earned
3.8
8.9
Cash/Sales
1%
1%
Return on assets (ROA)
5.5%
10.2%
Receivables/Sales
14%
11%
Profit margin (M)
3.30%
4.99%
Inventories/Sales
20%
15%
Sales/Assets
1.67
2.04
Fixed assets/Sales
25%
22%
Assets/Equity
1.94
1.58
Acc. pay. & accr. / Sales
4%
4%
Return on equity (ROE)
10.6%
16.1%
Tax rate

9. 40%
40%
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%
Additional Data
2014
Exp. Saled growth rate
10%
Interest rate on LT debt
8%
Target WACC
9%
Solution
A)
Hatfield is less profitable, uses its assets less efficiently, and has too much leverage
C)
The capital intensity ratio is defined as the ratio of required assets to total sales, or a*/s0. Put
another way, it represents the dollars of assets required per dollar of sales. The higher the capital
intensity ratio, the more new money will be required to support an additional dollar of sales.
Thus, the higher the capital intensity ratio, the greater the AFN, other things held constant.
If sales increase, more assets are required, which increases the AFN.
If the payout ratio were reduced, then more earnings would be retained, and this would reduce
the need for external financing, or AFN. Note that if the firm is profitable and has any payout
ratio less than 100 percent, it will have some retained earnings, so if the growth rate were zero,

10. AFN would be negative, i.e., the firm would have surplus funds. As the growth rate rose above
zero, these surplus funds would be used to finance growth. At some point, i.e., at some growth
rate, the surplus AFN would be exactly used up. This growth rate where AFN = $0 is called the
“sustainable growth rate,” and it is the maximum growth rate which can be financed without
outside funds, holding the debt ratio and other ratios constant.
If the amount of accounts payble reduced , this reduces spontaneous liabilities, leading to a
higher AFN.
E)DuPont
ROEMarginSales/assetsAsset/equityROEHatfield3.30%1.671.9410.60%Ibdustry4.99%2.041.58
16.10%