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Ratio Analysis - The Knee Depot Case Knee Depot, a building supplies company, has been lagging the rest of the industry in its performance. So the...

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Ratio Analysis – The Knee Depot Case Knee Depot, a building supplies company, has been lagging 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 todo 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. (5 points) 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. 2. (5 points) 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. 3. (10 points) How would the following items impact AFN, holding everything else constant: capital intensity, growth rate, increase in A/P, profit margin, payout ratio. 4. (3 points) What is KD’s internal growth rate (aka self-supporting growth rate)? 5. (12 Points) Forecast the Balance Sheet and Income Statement for 2013. In this scenario (call it the Steady Scenario ) operations are not changed in any way. What is the AFN? Calculate the following items: FCF, ROIC, EPS, DPS and ROE. Use the following assumptions: a. Operating ratios stay the same (use the ratios that appear in question 6). b. No additional long-term debt or equity is issued c. Interest rate on all debt is 10% d. Any additional funding will be acquired through a line of credit on the last day of the year (thus no interest for 2013) e. Dividends will grow by 15% f. Sales will grow by 15% 6. (15 points) Now assume that KD changes its operations such that it achieves industry averages for the following items: a. Operating costs / Sales b. Receivables / Sales c. Fixes Assets / Sales Under this scenario (call it the Improved Scenario ), what is the AFN, FCF, ROIC, EPS, DPS and ROE?
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Knee Depot Case Exhibit 1 - Financial Statements and Selected Ratios Balance Sheet 12/31/12 Assets Liabilities & Equity Cash and securities 20 Accounts pay. + accruals 100 Accounts receivable 290 Notes payable 80 Inventories 390 Total current liabilities 180 Total current assets 700 Long-term debt 520 Net fixed assets 500 Total liabilities 700 Common stock 300 Retained earnings 200 Total common equity 500 Total assets 1200 Total liab. & equity 1200 Income Statement 2012 Sales 2000 Total operating costs 1900 EBIT 100 Interest 60 EBT 40 Taxes (40%) 16 Net income 24 Dividends 9 Add. to retain. earnings 15 Shares outstanding 10 EPS 2.4 DPS 0.9 Year-end stock price 24 Selected Ratios and Other Data, 2012 KD Industry Sales, 2012 (S0): 2000 2000 Expected growth in sales: 0.15 0.15 Profit margin (M): 0.012 0.0274 Assets/Sales (A0*/S0): 0.6 0.5 Payout ratio (POR): 0.375 0.35 Equity multiplier (Assets/Equity): 2.4 2.13 Total liability/Total assets 0.583333 0.53
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