Chapter 4, Problems 4, 8, 9.

Problem 4. Table 3.1 below presents R&E Supplies financial statements for the period 2008 through 2011, and Table 3.5 presents a pro forma financial forecast for 2012. Use the information in these tables to answer the following questions.

Table 3.1 Financial Statements for R&E Supplies, Inc., December 31, 2008-2011 ($ thousands)

Income Statements
		2008			2009			2010			2011
Net sales		$11,190			$13,764			$16,104			$20,613
Cost of goods sold		9,400			11,699			13,688			17,727
Gross profit		1,790			2,065			2,416			2,886
Expenses:
General, selling, and administrative expenses		1,019			1,239			1,610			2,267
Net interest expense		100			103			110			90
Earnings before tax		671			723			696			529
Tax		302			325			313			238
Earnings after tax		$ 369			$ 398			$ 383			$ 291
Balance Sheets
Assets
Current assets:
Cash and securities		$ 671			$ 551			$ 644			$ 412
Accounts receivable		1,343			1,789			2,094			2,886
Inventories		1,119			1,376			1,932			2,267
Prepaid expenses		14			12			15			18
Total current assets		3,147			3,728			4,685			5,583
Net fixed assets		128			124			295			287
Total assets		$ 3,275			$ 3,852			$ 4,980			$ 5,870
Liabilities and Owners Equity
Current liabilities:
Bank loan	$ 50			$ 50			$ 50				$ 50
Accounts payable	1,007			1,443			2,426				3,212
Current portion long-term debt	60			50			50				100
Accrued wages	5			7			10				18
Total current liabilities	1,122			1,550			2,536				3,380
Long-term debt	960			910			860				760
Common stock	150			150			150				150
Retained earnings	1,043			1,242			1,434				1,580
Total liabilities and owners equity	$ 3,275			$ 3,852			$ 4,980				$ 5,870
Table 3.5 Pro Forma Financial Forecast for R&E Supplies, Inc., December 31, 2012 ($ thousands)
Year						2011 Actual				2012
Net sales						$20,613
Growth rate in sales										25.0%
Cost of goods sold/net sales										86.0%
General, sell., and admin., expenses/net sales										12.0%
Long-term debt						$ 760				$660
Current portion long-term debt						$ 100				$100
Interest rate										10.0%
Tax rate										45.0%
Dividend/earnings after tax										50.0%
Current assets/net sales										29.0%
Net fixed assets										$280
Current liabilities/net sales										14.5%
Owners equity						$ 1,730
Income Statement
Year			Equations (2012)						2012
Net sales			= $20,613 + ($20,613 x 25.0%)						$25,766
Cost of goods sold			= 86.0% x $25,766						22,159
Gross profit			= $25,766 - $22,159						3,607
Gen., sell., and admin. exp.			= 12.0% x $25,766						3,092
Interest expense			= 10.0% x ($660 + $100 + $1548)						231
Earnings before tax			= $3,607 - $3,092 -231						285
Tax			= 45.0% x $285						128
Earnings after tax			= $285 - $128						156
Dividends paid			= 50.0% x $156						78
Additions to retained earnings			= $156 - $78						78
Balance Sheet
Current assets			= 29.0% x $25,766						$ 7,472
Net fixed assets			= $280						280
Total fixed assets			= $7,472 + $280						$ 7,752
Current liabilities			= 14.5% x $25,766						$ 3,736
Long-term debt			= $660						660
Equity			= $1,730 + $78						$ 1,808
Total liabilities and			= $3,736 + $660 + $1,808						$ 6,204
shareholders equity
External Funding Required			= $7,752 - $6,204						$ 1,548

a. Calculate R&E Supplies sustainable growth rate in each year from 2009 through 2012.

b. Comparing the companys sustainable growth rate with its actual and projected growth rates in sales over these years, what growth management problems does R&E Supplies appear to face in this period?

c. How did the company cope with these problems? Do you see any difficulties with the way it addressed its growth problems over this period? If so, what are they?

d. What advice would you offer management regarding managing future growth?

Problem 8. Genentech Inc. is a California-based biotech pioneer recently acquired by Swiss pharmaceutical giant Roche Holding AG. Roche paid $46.8 billion in cash for the 44 percent of Genentech it did not already own, implying a market value of over $100 billion for the entire company. For a look at Genentechs recent sustainable growth challenges, consider the following selected financial data.

Year	2003	2004	2005	2006	2007
Profit margin (%)	17.0	17.0	19.3	22.8	23.6
Retention ratio (%)	100.0	100.0	100.0	100.0	100.0
Asset turnover (X)	0.38	0.49	0.55	0.63	0.62
Financial leverage (X)	1.64	1.44	1.79	1.99	2.00
Growth rate in sales (%)	26.1	40.0	43.5	40.0	26.3

a. Calculate Genentechs annual sustainable growth rate for the years 2003-2007.

b. Did Genentech face a growth management challenge during this period? Please explain briefly.

c. How did Genentech cope with this challenge?

d. Calculate Genentechs sustainable growth rate in 2007 assuming an asset turnover of 0.72 times. Calculate the sustainable growth rate in 2007 assuming a financial leverage of 2.20 times. Calculate the sustainable growth rate in 2007 assuming both of these changes occur.

Problem 9. Harley Davidson, Inc., the iconic motorcycle company, has the following ratios for the years 2000 through 2004:

Year	2000	2001	2002	2003	2004
Profit margin (%)	11.4	12.3	13.5	15.5	16.7
Retention ratio (%)	91.3	91.9	92.8	92.2	86.6
Asset turnover (X)	1.25	1.14	1.11	1.00	0.97
Assets (end of year, millions)	$2,436	$3,118	$3,861	$4,923	$5,483
Equity (end of year, millions)	$1,406	$1,756	$2,233	$2,958	$3,219
Growth rate in sales (%)	17.8	16.4	21.4	14.0	8.5

a. Calculate Harley Davidsons annual sustainable growth rate from 2001 through 2004.

b. Did Harley Davidson have a growth problem in these years?

c. How did Harley Davidson cope with its sustainable growth problems?