f. 2. What are some alternative ways than those in the preliminary financial policy that Hatfield might choose to eliminate the financing deficit? Answer: Here are some alternative ways to eliminate the deficit: Cut dividends. Add long-term debt. Issue common stock. Cut back on growth in operating plan. Improve operating plan. g. Repeat the analysis performed the previous question but now assume that Hatfield is able to improve the following inputs: (1) reduce operating costs (excluding depreciation)/sales to 89.5% at a cost of $40 million; and (2) reduce inventories/sales to 16% at a cost of $10 million. This is the scenario. Improve The impact on the operating plan is shown below: Answer: Scenario: Actual Forecast Improve 2014 2015 2016 2017 2013 $106 $114 $120 $126 NOPAT $90 $594 $642 $674 $707 NOWC $620 $1,144 $1,236 $1,297 $1,362 op. capital $1,120 $82 $23 $58 $61 FCF -72% 157.3% 5.0% Growth in FCF 9.2% 9.2% 9.2% 9.2% ROIC 8.0% Scenario: Improve $1,314 Horizon Value of operations $0 + ST investments $1,598 $1,314 = Estimated intrinsic value $500 All debt − $0 Value of Operations: Preferred − $1,132 $814 Present value of HV Estimated intrinsic value of equity + Present value of FCF $182 ÷ Number of shares 10 $1,314 $81.37 Estimated intrinsic stock price = of operations =
f. 2. What are some alternative ways than those in the preliminary financial policy that Hatfield might choose to eliminate the financing deficit? Answer: Here are some alternative ways to eliminate the deficit: Cut dividends. Add long-term debt. Issue common stock. Cut back on growth in operating plan. Improve operating plan. g. Repeat the analysis performed the previous question but now assume that Hatfield is able to improve the following inputs: (1) reduce operating costs (excluding depreciation)/sales to 89.5% at a cost of $40 million; and (2) reduce inventories/sales to 16% at a cost of $10 million. This is the Improve scenario. Answer: The impact on the operating plan is shown below: Scenario: Actual Forecast Improve 2013 2014 2015 2016 2017 NOPAT $90 $106 $114 $120 $126 NOWC $620 $594 $642 $674 $707 op. capital $1,120 $1,144 $1,236 $1,297 $1,362 FCF $82 $23 $58 $61 Growth in FCF -72% 157.3% 5.0% ROIC 8.0% 9.2% 9.2% 9.2% 9.2% Scenario: Improve Horizon Value of operations $1,314 + ST investments $0 = $1,598 Estimated intrinsic value $1,314 − All debt $500 Value of Operations: − Preferred $0 Present value of HV $1,132 Estimated intrinsic value of equity $814 + Present value of FCF $182 ÷ Number of shares 10 of operations = $1,314 Estimated intrinsic stock price = $81.37