The Knee Depot Case Knee Depot, a building supplies company, has been lagging behind the rest of the industry in its performance. So the board has brought in a new CEO, Milo T. Barnsworth to fix things. Since he had a strong financial background, the first item on his to-do list was to develop a financial planning section to an overall strategic plan.

Barnsworth began by comparing KD’s financial ratios to the rest of the industry. Whenever he encountered a substandard ratio, he would meet with the manager responsible to develop a plan to fix it. You have been hired to help Barnsworth finish his analysis of the company so that he can start implementing solutions. To do so, you must answer the following questions based on the financial data provided:

1. a. Given the data provided in Exhibit 1, how well run is KD compared to it industry peers? What are its primary strengths and weaknesses? Be specific, using ratios in your answer. Be sure to also use the DuPont equation in your analysis.

b. Use the AFN equation to estimate KD’s required external capital for 2013 if the expected 15% growth rate takes place. Assume the 2012 ratios (listed in question 6) will stay the same.

c. How would the following items impact AFN, holding everything else constant: capital intensity, growth rate, increase in A/P, profit margin, payout ratio.

d.What is KD’s internal growth rate (aka self-supporting growth rate)?

Transcribed Image Text:

Knee Depot Case Exhibit 1 - Financial Statements and Selected Ratios Balance Sheet 12/31/12 Assets Cash and securities Accounts receivable Inventories Total current assets Net fixed assets Total assets Income Statement 2012 Sales Total operating costs EBIT Interest EBT Taxes (40%) Net income Dividends Add. to retain. earnings Shares outstanding EPS DPS Year-end stock price Selected Ratios and Other Data, 2012 20 290 390 700 500 1200 2000 1900 100 60 40 16 24 9 15 10 2.4 0.9 24 Sales, 2012 (SO): Expected growth in sales: Profit margin (M): Assets/Sales (A0*/SO): Payout ratio (POR): Equity multiplier (Assets/Equity): KD 2000 0.15 0.012 0.6 0.375 2.4 Total liability/Total assets 0.583333 Liabilities & Equity Accounts pay. + accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liab. & equity Industry 2000 0.15 0.0274 0.5 0.35 2.13 0.53 100 80 180 520 700 300 200 500 1200 Knee Depot Case Exhibit 1 - Financial Statements and Selected Ratios Balance Sheet 12/31/12 Assets Cash and securities Accounts receivable Inventories Total current assets Net fixed assets Total assets Income Statement 2012 Sales Total operating costs EBIT Interest EBT Taxes (40%) Net income Dividends Add. to retain. earnings Shares outstanding EPS DPS Year-end stock price Selected Ratios and Other Data, 2012 20 290 390 700 500 1200 2000 1900 100 60 40 16 24 9 15 10 2.4 0.9 24 Sales, 2012 (SO): Expected growth in sales: Profit margin (M): Assets/Sales (A0*/SO): Payout ratio (POR): Equity multiplier (Assets/Equity): KD 2000 0.15 0.012 0.6 0.375 2.4 Total liability/Total assets 0.583333 Liabilities & Equity Accounts pay. + accruals Notes payable Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total common equity Total liab. & equity Industry 2000 0.15 0.0274 0.5 0.35 2.13 0.53 100 80 180 520 700 300 200 500 1200

Answer rating: 100% (QA)

Answer In the books of Knee Depot 1 Steady Scenario Income Statement for the year 2013 Particulars Amount Sales 20000152000 2300 Total Operating Costs ... View the full answer