Hatfield Medical Supplies's stock price had been lagging its indust...

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Hatfield Medical Supplies's stock price had been lagging its industry averages, so its board of directors brought in a new CEO, Jaiden Lee. Lee had brought in Ashley Novak, a finance MBA who had been working for a consulting company, to replace the old CFO, and Lee asked Ashley to develop the financial planning section of the strategic plan. In her previous job, Novak's primary task had been to help clients develop financial forecasts, and that was one reason Lee hired her. Novak began as she always did, by comparing Hatfield's financial ratios to the industry averages. If any vratio was substandard, she discussed it with the responsible manager to see what could be done to improve the situation. The following data shows Hatfield's latest financial statements plus some ratios and other data that Novak plans to use in her analysis. Hatfield Medical Supplies: Hatfield Medical Supplies: Balance Sheet (Millions of Income Statement (Millions of Dollars), 12/31/2013 Dollars Except per Share) 2013 Cash $20 Sales ####### Accts. rec. $280 Op. costs (excl.depr.) ####### Inventories $400 Depreciation $50.00 Total CA $700 EBIT ####### Net fixed assets $500 Interest $40.00 Total assets $1,200 Pretax earnings ####### Taxes (40%) $44.00 Accts. pay. & accruals $80 Net income $66.00 Line of credit $0 Total CL $80 Dividends $20.00 Long-term debt $500 Add. to RE $46.00 Total liabilities $580 Common shares 10 Common stock $420 EPS $6.60 Retained earnings $200 DPS $2.00 Total common equ. $620 Ending stock price $52.80 Total liab. & equity $1,200 Selected Ratios and Other Data, 2013 Hatfield Industry Hatfield Op.costs/Sales 90% 88% Total liability/Tota 48.30% Depr./FA 10% 12% Times interest earn 3.8 Cash/Sales 1% 1% Return on assets (R 5.50% Receivables/Sales 14% 11% Profit margin (M) 3.30% Inventories/Sales 20% 15% Sales/Assets 1.67 Fixed assets/Sales 25% 22% Assets/Equity 1.94 Acc. pay. & accr. / 4% 4% Return on equity (R 10.60% Tax rate 40% 40% P/E ratio 8 ROIC 8.00% 12.50% NOPAT/Sales 4.50% 5.60% Total op.capital/Sale 56.00% 45.00% Additional Data 2014 Exp. Saled growth rat 10% Interest rate on LT de 8% Target WACC 9% a. Using Hatfield's data and its industry averages, 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 as one part of your analysis. b. Use the Additional Funds Needed equation to estimate Hatfield's required new external capital for 2014 if the sale growth rate is 10% Assume that the firm's 2013 ratios will remain the same in 2014. (Hint: Hatfield was operating at full capacity in 2013.)

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The ROE of Hatfield is much lower than that of the industry because of lower profit margin coupled with lower total assets turnover although it has a higher equity multiplier than the industry average.

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
= 3.30% * 1.67 * 1.94
= 10.60%...

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