Answer the following questions using the information below. Show working and details of how you got the answer. 1. Calculate the expected Free Cash Flows from an operating, or asset perspective for 2009, and explain how the cash flows were utilized, and its impact on the expansion plan. How did the company finance its expansion programs? 2. What is the maximum growth rate, or sustainable growth rate the company can achieve in 2009 without the firm having to raise external funds? The companys dividends payout ratio is 25%. How does this growth rate compare to the forecasted 2009 growth rate in sales? Johnson is a small regional food producer whose specialty is high-quality nut products sold in the snack foods market.

The company decided in 2007 to undertake a major expansion and go national in competition with some major snack foods companies. The company believes that its products were of higher quality than its competitors and that this quality difference will enable it to charge a premium price which would lead to greatly increased sales, profits and stock price. The company double its plant capacity and undertaken a major marketing campaign in an attempt to go national. Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2008, rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firms survival. Joan Watson was brought in as assistant to John King, Johnsons chairman, who had the task of getting the company back into a sound financial position. Johnsons 2007 and 2008 actual balance sheets and income statements, together with projections for 2009, are given in Tables 1 and 2 In addition, Table 3 gives the companys 2007 and 2008 financial ratios, together with industry average data. The 2009 projected financial statement data represent the companys best guess for 2009 results, assuming that some new financing is arranged to get the company over the hump. Watson examined monthly data for 2008 (not given in the case), and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than Johnsons managers had anticipated. For these reasons, the company see hope for the companyprovided it can survive in the short run. Watson must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers. Table 1. Balance Sheets 2009E 2008 2007 Assets Cash $ 85,632 $ 7,282 $ 57,600 Accounts receivable 878,000 632,160 351,200 Inventories 1,716,480 1,287,360 715,200 Total current assets $ 2,680,112 $ 1,926,802 $ 1,124,000 Gross fixed assets 1,197,160 1,202,950 491,000 Less accumulated depreciation 380,120 263,160 146,200 Net fixed assets $ 817,040 $ 939,790 $ 344,800 Total assets $ 3,497,152 $ 2,866,592 $ 1,468,800 Liabilities and Equity Accounts payable $ 436,800 $ 524,160 $ 145,600 Notes payable 300,000 636,808 200,000 Accruals 408,000 489,600 136,000 Total current liabilities $ 1,144,800 $ 1,650,568 $ 481,600 Long-term debt 400,000 723,432 323,432 Common stock 1,721,176 460,000 460,000 Retained earnings 231,176 32,592 203,768 Total equity $ 1,952,352 $ 492,592 $ 663,768 Total liabilities and equity $ 3,497,152 $ 2,866,592 $ 1,468,800 Note: E indicates estimated. The 2009 data are forecasts. Table 2. Income Statements 2009E 2008 2007 Sales $ 7,035,600 $ 6,034,000 $ 3,432,000 Cost of goods sold 5,875,992 5,528,000 2,864,000 Other expenses 550,000 519,988 358,672 Total operating costs excluding depreciation $ 6,425,992 $ 6,047,988 $ 3,222,672 EBITDA $ 609,608 ($ 13,988) $ 209,328 Depreciation 116,960 116,960 18,900 EBIT $ 492,648 ($ 130,948) $ 190,428 Interest expense 70,008 136,012 43,828 EBT $ 422,640 ($ 266,960) $ 146,600 Taxes (40%) 169,056 (106,784) a 58,640 Net income $ 253,584 ($ 160,176) $ 87,960 EPS $ 1.014 ($ 1.602) $ 0.880 DPS $ 0.220 $ 0.110 $ 0.220 Book value per share $ 7.809 $ 4.926 $ 6.638 Stock price $ 12.17 $ 2.25 $ 8.50 Shares outstanding 250,000 100,000 100,000 Tax rate 40.00% 40.00% 40.00% Lease payments 40,000 40,000 40,000 Sinking fund payments 0 0 0 Note: E indicates estimated. The 2009 data are forecasts. a The firm had sufficient taxable income in 2006 and 2007 to obtain its full tax refund in 2008. Table 3. Ratio Analysis Industry 2009E 2008 2007 Average Current 1.2 2.3 2.7 Quick 0.4 0.8 1.0 Inventory turnover 4.7 4.8 6.1 Days sales outstanding (DSO) a 38.2 37.4 32.0 Fixed assets turnover 6.4 10.0 7.0 Total assets turnover 2.1 2.3 2.6 Debt ratio 82.8% 54.8% 50.0% TIE -1.0 4.3 6.2 Operating margin (EBIT) -2.2% 5.6% 7.3% Net Profit margin -2.7% 2.6% 3.5% ROA -5.6% 6.0% 9.1% ROE -32.5% 13.3% 18.2% Note: E indicates estimated. The 2009 data are forecasts. a Calculation is based on a 365-day year. TABLE 4. Statement of Stockholders Equity, 2008 Total Common Stock Retained Stockholders Shares Amount Earnings Equity Balances, 12/31/07 100,000 $460,000 $203,768 $663,768 2008 Net Income (160,176) Cash Dividends (11,000) Addition (Subtraction) to Retained Earnings (171,176) (171,176) Balances, 12/31/08 100,000 $460,000 $ 32,592 $492,592 Table 5. Statement of Cash Flows, 2008 Operating Activities Net income ($ 160,176) Depreciation and amortization 116,960 Increase in accounts payable 378,560 Increase in accruals 353,600 Increase in accounts receivable (280,960) Increase in inventories (572,160) Net cash provided by operating activities ($ 164,176) Long-Term Investing Activities Additions to property, plant, and equipment ($ 711,950) Net cash used in investing activities ($711,950) Financing Activities Increase in notes payable $ 436,808 Increase in long-term debt 400,000 Payment of cash dividends (11,000) Net cash provided by financing activities $ 825,808 Summary Net decrease in cash ($ 50,318) Cash at beginning of year 57,600 Cash at end of year $ 7,282