Hatfield Medical Supplies's stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Adam Lee. Lee asked for the company's long-run strategic plan; when he learned that no formal plan existed, he decided to develop one himself. Lee had brought in Rick Novak, a finance MBA who had been working for a consulting company, to replace the old CFO, and he asked Rick to develop the financial planning section of the strategic plan. In his previous job, Novak's primary task had been to help clients develop financial forecasts, and that was one reason Lee hired him. Novak began as he always did, by comparing Hatfield's financial ratios to the industry averages. If any ratio was substandard, he discussed it with the responsible manager to see what could be done to improve the situation. Figure 9-MC-1 provides Hatfield's latest financial statements plus some ratios and other data that Novak plans to use in his analysis. Notice that the figure is extracted from an Excel spreadsheet. Novak learned back in his university days that, because of interactions among variables, any realistic financial forecast must be based on a computer model. (The model is available to your instructor on the textbook's Web site.) Of course, he is also aware of the well-known computer axiom-garbage in, garbage out (GIGO). Novak therefore plans to discuss the model's inputs carefully with Hatfield's operating managers, individually and also collectively in the company's financial planning conference.
a. Do you think Adam Lee should develop a strategic plan for the company? Why? What are the central elements of such a plan? What is the role of finance in a strategic plan?
b. Given the data in Figure 9-MC-1, 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 8) as one part of your analysis.
c. Use the AFN equation to estimate Hatfield's required new external capital for 2013 if the 15% expected growth takes place. Assume that the firm's 2012 ratios will remain the same in 2013.
d. 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.
e. Define the term self-supporting growth rate. Based on the Figure 9-MC-1 data, what is Hatfield's selfsupporting growth rate? Would the self-supporting growth rate be affected by a change in the capital intensity ratio or the other factors mentioned in question
d? 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?
f. Forecast the financial statements for 2013 using the following assumptions.
(1) Operating ratios remain unchanged.
(2) No additional notes payable, LT bonds, or common stock will be issued.
(3) The interest rate on all debt is 10%.
(4) If additional financing is needed, then it will be raised through 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.
(5) Interest expenses for notes payable and LT bonds are based on the average balances during the year.
(6) If surplus funds are available, the surplus will be paid out as a special dividend payment.
(7) Regular dividends will grow by 15%.
(8) Sales will grow by 15%. We call this the Steady scenario because operations remain unchanged.
(1) How much new capital will the firm need (i.e., what is the forecasted AFN); how does

it compare with the amount you calculated using the AFN equation; and why does any difference exist?
(2) Calculate the firm's free cash flow, return on invested capital, EPS, DPS, ROE, and any other ratios you think would be useful in considering the situation.
(3) Assuming all of the inputs turn out to be exactly correct, would these answers also be exactly correct? If not, why not?
g. Repeat the analysis performed for Question f but now assume that Hatfield is able to achieve industry averages for the following input variables: operating costs/sales, receivables/sales, inventories/sales, and fixed assets/sales. Answer parts
(1) and
(2) of Question f under the new assumptions.
h. Could a strategic plan that included an incentive compensation program affect the firm's ability to move toward industry average operating performance?
i. What is financing feedback?

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Figure 9-MC-1 Financial Statements and Other Data (Millions, Except for Per Share Data) 5 Cash and securities 6 Accounts receivable 7 Inventories 8 Total current assets 9 Net fixed assets 10 Total assets otal operating costs 1,900 $100 390 $700 axes (40%) 16 12 Accounts pay. +accruals $100 13 Notes payable 14 Total current liabilities 15 Long-term debt 16 Total liabilities 17 Common stock 18 Retained e to retain. eanings $15 10 $2.40 S0.90 $24.00 EPS 520 $700 Year-end stock 200 $500 9 Total common equity 20 Total liab.& 21 Ratios Sales, 2012 (So): Expected growth in sales: Profit margin (M): Assets/Sales (Ao/So): Payout ratio (POR): Equity multiplier (Assets/Equity): Total liability/Total assets Times interest earned (EBIT/Interest): Increase in sales (AS gSu): (Payables +Accruals Sales (L S): $2,000 15.0% 2.74% 50.0% 35.0% 2.13 53.0% Sales set equal to Hatfield to make the data comparable. 15.0% 1.2% 600% 375% 2.40 58.3% 1.67 31 50% 95.0% 1.0% 14.5% 19.5% 25.0% 400% 10.00% 10.0 4.80% 4.0% 93.0% 10% 11.0% 15.0% 23.0% 40.0% 9.5% 12.0 11.64% Fixed assets/Sales: Tax rate: Interest rate on all debt: Price/Earning (P/E): ROE t income/Common Note: Hatfield was operating at full capacity in 2012.