Chapter 12 Mini Case

Hatfield Medical Supply’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 ratio 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 Supply: Balance Sheet (Millions of Hatfield Medical Supply: Income Statement
Dollars), December 31 (Millions of Dollars Except per Share)

2016
Cash $20 Sales
Accts. rec. $280 Op. costs (excl. depr.)
Inventories $400 Depreciation
Total CA $700 EBIT

Net fixed assets $500 Interest

Total assets $1,200 Pretax earnings
Taxes (40%)
Accts. pay. & accruals $80 Net income
Line of credit $0
Total CL $80 Dividends
Long-term debt $500 Add. to RE
Total liabilities $580 Common shares
Common stock $420 EPS
Retained earnings $200 DPS
Total common equ. $620 Ending stock price
Total liab. & equity $1,200

Selected Ratios and Other Data, 2016

Hatfield Industry
(Op. costs)/Sales 90% 88% (Total liabilities)/(Total assets)
Depr./FA 10% 12% Times interest earned
Cash/Sales 1% 1% Return on assets (ROA)
Receivables/Sales 14% 11% Profit margin (M)
Inventories/Sales 20% 15% Sales/Assets
Fixed assets/Sales 25% 22% Assets/Equity
(Acc. pay. & accr.)/Sales 4% 4% Return on equity (ROE)
Tax rate 40% 40% P/E ratio
ROIC 8.0% 12.5%
NOPAT/Sales 4.5% 5.6%
(Total op. capital)/Sales 56.0% 45.0%
Additional Data 2017
Exp. Sales growth rate 10%
Interest rate on LT debt 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 DuPont equation (see Chapter 7) as one part of your
analysis.

Hatfield is less profitable, uses its assets less efficiently, and has too much leverage.

Du Pont ROE M x Sales/Assets x Assets/Equity =

Hatfield 3.30% 1.67 1.94 =
Industry 4.99% 2.04 1.58 =

b. Use the AFN equation to estimate Hatfield’s required new external capital for 2017 if the sale growth rate is 10%.
Assume that the firm’s 2016 ratios will remain the same in 2017. (Hint: Hatfield was operating at full capacity in
2016.)

Data for AFN Method

Growth rate in sales (g) 10%
Sales (S0) $2,000
Required assets (A0*) $1,200
Spontaneious liabilities (L0*) $80
Forecasted sales (S1) $2,200
Increase in sales (ΔS = gS0) $200
Profit margin (M) 3.30%
Assets/Sales (A0*/S0) 60.0%
Payout ratio (POR) 30.3%
Spont. Liab./Sales (L0*/S0) 4.0%

Increase in
AFNHatfield = Required increase
in assets − spontaneous −
liabilities

= (A0*/S0)∆S − (L0*/S0)∆S −
= $120.0 − $8.0 −

AFNHatfield = $61.40 million

c. Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held
constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant?
Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate,
the amount of accounts payable, the profit margin, and the payout ratio. Answer: See PowerPoint Show
c. Define the term capital intensity. Explain how a decline in capital intensity would affect the AFN, other things held
constant. Would economies of scale combined with rapid growth affect capital intensity, other things held constant?
Also, explain how changes in each of the following would affect AFN, holding other things constant: the growth rate,
the amount of accounts payable, the profit margin, and the payout ratio. Answer: See PowerPoint Show

d. Define the term self-supporting growth rate. What is Hatfield’s self-supporting growth rate? Would the self-
supporting growth rate be affected by a change in the capital intensity ratio or the other factors mentioned in the
previous question? Other things held constant, would the calculated capital intensity ratio change over time if the
company were growing and were also subject to economies of scale and/or lumpy assets? Answer: See PowerPoint
Show

Self-Supporting Growth Rate. This is the maximum growth rate that can be attained without raising external funds,
i.e., the value of g that forces AFN = 0, holding other things constant. We found this rate, ith Excel's Goal Seek
function and also algebraically, as explained below.

1. Using algebra. The self-supporting growth rate can also be found by setting the AFN equation to zero and then
solving for g.

M(1 – POR)(S0)
Self-Supporting g = = ──────────────────────
A0* – L0* – M(1 – POR)S0

M= 3.30%
POR = 30.3%
1-POR = 69.7%
S0 = $2,000
A* = $1,200
L* = $80

M(1 – POR)(S0) $46.00

Self-Supporting g = ─────────────────── = ──────── =
A0* – L0* – M(1 – POR)S0 $1,074.00

2. Using Goal Seek. To find the self-supporting growth rate with Goal Seek, select Data, What-If Analysis, and Goal
Seek; then choose cell with the AFN (B96) as the value for the "Set Cell" area of the Goal Seek dialog box, choose 0 as
the value for the "To Value" area of the dialog box, and choose the cell with the growth rate (C54) as the value for the
"By Changing Cell" area of the dialog box. Then hit OK.

e. Use the following assumptions to answer the questions below: (1) Operating ratios remain unchanged. (2) Sales
will grow by 10%, 8%, 5%, and 5% for the next four years. (3) The target weighted average cost of capital (WACC) is
9%. This is the No Change scenario because operations remain unchanged.
e. Use the following assumptions to answer the questions below: (1) Operating ratios remain unchanged. (2) Sales
will grow by 10%, 8%, 5%, and 5% for the next four years. (3) The target weighted average cost of capital (WACC) is
9%. This is the No Change scenario because operations remain unchanged.

Inputs for the forecast are shown below. You can change inputs in blue. You can show the original scenario by going
to Data, What-If Analysis, Scenario Manager, and select the scenario named No Change.

Scenario:
No Change
Actual Forecast
Inputs 2016 2017 2018 2019
Sales growth rate: 10% 8% 5%
(Op. costs)/Sales: 90% 90.0% 90% 90%
Depr./FA 10% 10% 10% 10%
Cash/Sales: 1% 1% 1% 1%
(Acct. rec.)/Sales 14% 14% 14% 14%
Inv./Sales: 20% 20% 20% 20%
FA/Sales: 25% 25% 25% 25%
(AP & accr.)/ Sales: 4% 4% 4% 4%
Tax rate: 40% 40% 40% 40%
Rate on all debt 8.0% 8% 8%
Div. growth rate: 5% 10% 10% 10%
Target WACC 9%

e. (1) For each of the next four years, forecast the following items: sales, cash, accounts receivable, inventories, net
fixed assets, accounts payable & accruals, operating costs (excluding depreciation), depreciation, and earnings
before interest and taxes (EBIT).

Scenario:
No Change
Actual Forecast
2016 2017 2018 2019
Net sales $2,000 $2,200 $2,376 $2,495
Cash $20 $22 $24 $25
Accounts receivable $280 $308 $333 $349
Inventories $400 $440 $475 $499
Net fixed assets $500 $550 $594 $624
Accts. pay. & accruals $80 $88 $95 $100
Op. costs (excl. depr.) $1,800 $1,980 $2,138 $2,245
Depreciation $50 $55 $59 $62
EBIT $150 $165 $178 $187

e. (2) Using the previously forecasted items, calculate for each of the next four years the net operating profit after
taxes (NOPAT), net operating working capital, total operating capital, free cash flow, (FCF), annual growth rate in
FCF, and return on invested capital. What does the forecasted free cash flow in the first year imply about the need
for external financing? Compare the forecasted ROIC compare with the WACC. What does this imply about how well
the company is performing?

Scenario: Actual Forecast

No Change 2016 2017 2018 2019
 NOPAT $90 $99 $107 $112
NOWC $620 $682 $737 $773
Total op. capital $1,120 $1,232 $1,331 $1,397
FCF −$13 $8 $46
Growth in FCF -164% 447.1%
ROIC 8.0% 8.0% 8.0% 8.0%

e. (3) Assume that FCF will continue to grow at the growth rate for the last year in the forecast horizon (Hint: 5%).
What is the horizon value at 2020? What is the present value of the horizon value? What is the present value of the
forecasted FCF? (Hint: use the free cash flows for 2017 through 2020). What is the current value of operations?
Using information from the 2016 financial statements, what is the current estimated intrinsic stock price?

Scenario:
No Change
Horizon Value: Value of operations
+ ST investments
〖��〗 _𝟐𝟎𝟐𝟎= ( 〖��
= $1,261 Estimated total intrinsic value
�〗 _𝟐𝟎𝟐𝟎 (𝟏+𝐠_𝐋))/
((𝐖𝐀�� − 𝐠_𝐋)) − All debt
Value of Operations: − Preferred stock
Present value of HV $893 Estimated intrinsic value of equity
+ Present value of FCF $64 ÷ Number of shares
Value of operations = $958 Estimated intrinsic stock price =

f. Continue with the same assumptions for the No Change scenario from the previous question, but now forecast the
balance sheet and income statements for 2017 (but not for the following three years) using the following
preliminary financial policy. (1) Regular dividends will grow by 10%. (2) No additional long-term debt or common
stock will be issued. (3) The interest rate on all debt is 8%. (4) Interest expense for long-term debt is based on the
average balance during the year. (5) If the operating results and the preliminary financing plan cause a financing
deficit, eliminate the deficit by drawing on a line of credit. The line of credit would be tapped on the last day of the
year, so it would create no additional interest expenses for that year. (6) If there is a financing surplus, eliminate it
by paying a special dividend. After forecasting the 2017 financial statements, answer the following questions.

No Change
1. Balance Sheets Most Recent
2016 Input Basis for 2017 Forecast
Assets
Cash $20.0 1.00% × 2017 Sales
Accts. rec. 280.0 14.00% × 2017 Sales
Inventories 400.0 20.00% × 2017 Sales
Total CA $700.0
Net fixed assets 500.0 25.00% × 2017 Sales
Total assets $1,200.0
Liabilities and equity
Accts. pay. & accruals $80.0 4.00% × 2017 Sales
Line of credit 0.0 Draw on LOC if financing deficit
Total CL $80.0
Long-term debt 500.0 Carry over from previous year
Total liabilities $580.0
Common stock 420.0 Carry over from previous year
Retained earnings 200.0 Old RE + Add. to RE
Total common equity $620.0
Total liabs. & equity $1,200.0
Check: TA − Total Liab. & Eq. =
2. Income Statement Most Recent
2016 Input Basis for 2017 Forecast
Sales $2,000.0 110% × 2016 Sales
Op. costs (excl. depr.) 1,800.0 90.00% × 2017 Sales
Depreciation 50.0 10.00% × 2017 Net fixed assets
EBIT $150.0
Less: Interest on LTD 40.0 8.00% × Avg bonds
Interest on LOC 0.0 8.00% × Beginning LOC
Pretax earnings $110.0
Taxes (40%) 44.0 40.00% × Pretax earnings
Net income $66.0
Regular common dividends $20.0 110% × 2016 Dividends
Special dividends $0.0 Pay if financing surplus
Addition to RE $46.0 Net income – Dividends

3. Elimination of the Financial Deficit or Surplus

Increase in spontaneous liabilities (accounts payable and accruals)
+ Increase in long-term debt and common stock
− Previous line of credit
+ Net income minus regular common dividends
Increase in financing
− Increase in total assets
Amount of deficit or surplus financing:
If deficit in financing (negative), draw on line of credit Line of credit
If surplus in financing (positive), pay special dividend Special dividend

g. Repeat the analysis performed the previous question but now assume that Hatfield is able to improve the
following inputs: operating costs (excluding depreciation)/sales = 89.5% and inventories/sales = 16%. This is the
Improve scenario.

Go to Scenario Manager and choose the Improve Scenario. This will update the financial statements shown above.

Note: see to right for the Improve Scenario's financial statements with fixed values and not variables.
 10/28/15

directors brought in a
for a consulting
ion of the strategic plan.
s, and that was one

ges. If any ratio was

prove the situation. The
hat Novak plans to use

y: Income Statement
Except per Share)

2016
$2,000.0
$1,800.0
$50.0
$150.0

$40.0
$110.0
$44.0
$66.0

$20.0
$46.0
10.0
$6.6
$2.0
$52.80

Hatfield Industry
48.3% 36.7%
3.8 8.9
5.5% 10.2%
3.30% 4.99%
1.67 2.04
1.94 1.58
10.6% 16.1%
8.0 16.0
 rs to be in comparison
in your answer, and
r 7) as one part of your

ROE
10.6%
16.1%

ale growth rate is 10%.

ng at full capacity in

Increase in
retained earnings

M ×S1 × (1–POR)
$50.6

e AFN, other things held

er things held constant?
nstant: the growth rate,
Point Show
e? Would the self-
ors mentioned in the
hange over time if the
nswer: See PowerPoint

raising external funds,

xcel's Goal Seek

ion to zero and then

4.283%

t-If Analysis, and Goal

dialog box, choose 0 as
C54) as the value for the

n unchanged. (2) Sales

cost of capital (WACC) is
ginal scenario by going

For inputs:
2020 Error Check
5% Ok The last 2 years of growth must have
90% Ok same value to get constant growth in
10% Ok FCF. The last 3 years of the operating
1% Ok ratios must have same value to get
constant growth in FCF. An error
14% Ok
message will appear if this condition is
20% Ok violated.
25% Ok
4% Ok
40% Ok
8%
10%

vable, inventories, net

tion, and earnings

2020
$2,620
$26
$367
$524
$655
$105
$2,358
$65
$196

operating profit after

nnual growth rate in
imply about the need
s imply about how well

2020 Definitions:
 $118 NOPAT = EBIT(1-T)
$812 NOWC = (Cash + accounts receivable + inventories) − (Accounts payable & accruals)
$1,467 Total operating capital = NOWC + Net fixed assets
$48 FCF = NOPAT − Change in total operating capital
5.0%
8.0% ROIC = NOPAT/Total operating capital

st horizon (Hint: 5%).

he present value of the
lue of operations?
ic stock price?

$958
$0
$958
$500
$0
$458
10
$45.75

n, but now forecast the

he following
term debt or common
m debt is based on the
an cause a financing
on the last day of the
g surplus, eliminate it
owing questions.

Forecast Note: see to right for the No Change financial statements with fixed No Change
2017 values and not variables. 1. Balance Sheets

$22.00 Assets
$308.00 Cash
$440.00 Accts. rec.
$770.00 Inventories
$550.00 Total CA
$1,320.00 Net fixed assets
Total assets
$88.00 Liabilities and equity
$59.00 Accts. pay. & accruals
$147.00 Line of credit
 $500.00 Total CL
$647.00 Long-term debt
$420.00 Total liabilities
$253 Common stock
$673 Retained earnings
$1,320 Total common equity
$0.00 Total liabs. & equity
Forecast
2017 2. Income Statement
$2,200.00
$1,980.00 Sales
$55.00 Op. costs (excl. depr.)
$165.00 Depreciation
$40.00 EBIT
$0.00 Note: If there is an initial balance on the on the LOC, the Less: Interest on LTD
$125.00 assumption is that the balance will not change until Interest on LOC
the last day of the year. Therefore, the interest for the
$50.00 year is the based only on the beginning balance. Pretax earnings
$75.00 Taxes (40%)
$22.00 Net income
$0.00 Regular common dividend
$53.00 Special dividends
Addition to RE

$8.00 3. Elimination of the Financial Deficit or Sur

$0.00 Note: If there is a LOC in the previous year, then it is Increase in spontaneous liabilities (acco
$0.00 necessary to subtract the previous year's line of + Increase in long-term debt and common
credit. In other words, this is like paying off the old
$53.00 line of credit on the last day of the year and then − Previous line of credit
$61.00 drawing on a new line of credit. + Net income minus regular common divid
$120.00 Increase in financing
−$59.00 − Increase in total assets
$59.00 Amount of deficit or surplus financing:
$0.00 If deficit in financing (negative), draw on
If surplus in financing (positive), pay sp

to improve the
les = 16%. This is the

ements shown above.

xed values and not variables. Improve

1. Balance Sheets

Assets
Cash
Accts. rec.
Inventories
Total CA
Net fixed assets
 Total assets
Liabilities and equity
Accts. pay. & accruals
Line of credit
Total CL
Long-term debt
Total liabilities
Common stock
Retained earnings
Total common equity
Total liabs. & equity

2. Income Statement

Sales
Op. costs (excl. depr.)
Depreciation
EBIT
Less: Interest on LTD
Interest on LOC
Pretax earnings
Taxes (40%)
Net income
Regular common dividend
Special dividends
Addition to RE

3. Elimination of the Financial Deficit or Sur

Increase in spontaneous liabilities (acco
+ Increase in long-term debt and common
− Previous line of credit
+ Net income minus regular common divid
Increase in financing
− Increase in total assets
Amount of deficit or surplus financing:
If deficit in financing (negative), draw on
If surplus in financing (positive), pay sp
le & accruals)

Most Recent Forecast

2016 Input Basis for 2017 Forecast 2017

$20.0 1.00% × 2017 Sales $22.00

280.0 14.00% × 2017 Sales $308.00
400.0 20.00% × 2017 Sales $440.00
$700.0 $770.00
500.0 25.00% × 2017 Sales $550.00
$1,200.0 $1,320.00

$80.0 4.00% × 2017 Sales $88.00

0.0 Draw on LOC if financing deficit $59.00
 $80.0 $147.00
500.0 Carry over from previous year $500.00
$580.0 $647.00
420.0 Carry over from previous year $420.00
200.0 Old RE + Add. to RE $253
$620.0 $673
$1,200.0 $1,320
Check: TA − Total Liab. & Eq. = $0.00
Most Recent Forecast
2016 Input Basis for 2017 Forecast 2017
$2,000.0 110% × 2016 Sales $2,200.00
1,800.0 90.00% × 2017 Sales $1,980.00
50.0 10.00% × 2017 Net fixed assets $55.00
$150.0 $165.00
40.0 8.00% × Avg bonds $40.00
0.0 8.00% × Beginning LOC $0.00
$110.0 $125.00
44.0 40.00% × Pretax earnings $50.00
$66.0 $75.00
$20.0 110% × 2016 Dividend $22.00
$0.0 Pay if financing surplus $0.00
$46.0 Net income – Dividends $53.00

of the Financial Deficit or Surplus

spontaneous liabilities (accounts payable and accruals) $8.00
ong-term debt and common stock $0.00
$0.00
minus regular common dividends $53.00
$61.00
$120.00
cit or surplus financing: −$59.00
inancing (negative), draw on line of credit Line of credit $59.00
financing (positive), pay special dividend Special dividend $0.00

Most Recent Forecast

2016 Input Basis for 2017 Forecast 2017

$20.0 1.00% × 2017 Sales $22.00

280.0 14.00% × 2017 Sales $308.00
400.0 16.00% × 2017 Sales $352.00
$700.0 $682.00
500.0 25.00% × 2017 Sales $550.00
 $1,200.0 $1,232.00

$80.0 4.00% × 2017 Sales $88.00

0.0 Draw on LOC if financing deficit $0.00
$80.0 $88.00
500.0 Carry over from previous year $500.00
$580.0 $588.00
420.0 Carry over from previous year $420.00
200.0 Old RE + Add. to RE $224
$620.0 $644
$1,200.0 $1,232
Check: TA − Total Liab. & Eq. = $0.00
Most Recent Forecast
2016 Input Basis for 2017 Forecast 2017
$2,000.0 110% × 2016 Sales $2,200.00
1,800.0 89.50% × 2017 Sales $1,969.00
50.0 10.00% × 2017 Net fixed assets $55.00
$150.0 $176.00
40.0 8.00% × Avg bonds $40.00
0.0 8.00% × Beginning LOC $0.00
$110.0 $136.00
44.0 40.00% × Pretax earnings $54.40
$66.0 $81.60
$20.0 110% × 2016 Dividends $22.00
$0.0 Pay if financing surplus $35.60
$46.0 Net income – Dividends $24.00

of the Financial Deficit or Surplus

spontaneous liabilities (accounts payable and accruals) $8.00
ong-term debt and common stock $0.00
$0.00
minus regular common dividends $59.60
$67.60
$32.00
cit or surplus financing: $35.60
inancing (negative), draw on line of credit Line of credit $0.00
financing (positive), pay special dividend Special dividend $35.60
 Financing Feeback

This worksheet shows how to incorporate the impact of financing feedback, which is caused if the LOC is added during the y
and not just at the end of the year. The extra notes below show the changes from this model and the one in the first workshe
Mini Case".

Note: All inputs are linked to the first worksheet, "1. Mini Case", so don't make changes here!
If you want to see a different scenario, go the the first worksheet, "1. Mini Case", and use the Scenario
Manager there to make changes.

No Change
1. Balance Sheets Most Recent
2016 Input Basis for 2017 Forecast
Assets
Cash $20.0 1.00% × 2017 Sales
Accts. rec. 280.0 14.00% × 2017 Sales
Inventories 400.0 20.00% × 2017 Sales
Total CA $700.0
Net fixed assets 500.0 25.00% × 2017 Sales
Total assets $1,200.0
Liabilities and equity $0.0
Accts. pay. & accruals $80.0 4.00% × 2017 Sales
Line of credit 0.0 0.00% Draw on LOC if financing deficit
Total CL $80.0
Long-term debt 500.0 0.00 Carry over from previous year
Total liabilities $580.0
Common stock 420.0 Carry over from previous year
Retained earnings 200.0 Old RE + Add. to RE
Total common equity $620.0
Total liabs. & equity $1,200.0
Check: TA − Total Liab. & Eq. =
2. Income Statement Most Recent
2016 Input Basis for 2017 Forecast
Sales $2,000.0 110% × 2016 Sales
Op. costs (excl. depr.) 1,800.0 90.00% × 2017 Sales
Depreciation 50.0 10.00% × 2017 Net fixed assets
EBIT $150.0
Less: Interest on LTD 40.0 8.00% × Avg bonds
Interest on LOC 0.0 8.00% × Avg LOC
Pretax earnings $110.0
Taxes (40%) 44.0 40.00% × Pretax earnings
Net income $66.0
Regular common dividends $20.0 110% × 2016 Dividends
Special dividends $0.0 Pay if financing surplus
Addition to RE $46.0 $0.00 Net income – Dividends

3. Elimination of the Financial Deficit or Surplus

Increase in spontaneous liabilities (accounts payable and accruals)
+ Increase in long-term debt and common stock
− Previous line of credit
+ Planned increase in retained earnings
+ After-tax operating income: EBIT (1-T)
− After-tax interest on LT debt: (INTLTD x (1-T)
− After-tax interest on previous LOC: (rLOC x 0.5 x LOCt-1 x (1-T)
− Regular common dividends
Total planned increase in the retained earnings account

Increase in financing
− Increase in total assets
Amount of unadjusted deficit or surplus financing:

If there is a surplus (the financing need is positive), pay a special dividend:

If there is a deficit (the financing need is positive), draw on the LOC:

Unadjusted line of credit =
Adjustment factor (see note below) =
Adjusted line of credit = Unadjusted LOC / Adjustment factor =

The adjustment factor takes into account the financing feedback. The formula for the factor is:
Adjustment factor =1-[0.5 x rLOC x (1-T)]
The 0.5 in the formula is based on the assumption that the LOC will be added smoothly throughout the year, so the new inte
will be incurred on only half the new LOC. Interest is deductible for tax pursposes, so it is only the after-tax impact that
determines the adjusted LOC.
 10/28/15

OC is added during the year

one in the first worksheet, "1.

ges here!
nd use the Scenario

Forecast
2016

$22.00
$308.00
$440.00
$770.00
$550.00
$1,320.00

$88.00
$60.45
$148.45
$500.00
$648.45
$420.00
$252
$672
$1,320
$0.00
Forecast
2016
$2,200.00
$1,980.00
$55.00
$165.00
$40.00
$2.42 Note: The interest on the LOC is based on the LOC's average value during the year.
$122.58
$49.03
$73.55
$22.00
$0.00
$51.55

$8.0
$0.0
 $0.0 Note: We subtract the previous LOC because the plan does not call for any projected LOC unless nec

$99.0
$24.0
$0.0 Note: Note: interest expense is incurred on the planned LOC. Because the plan does not call for any
$22.0 balance is equal to
$53.0 (LOCt-1 + 0)/2 = 0.5*LOCt-1.

$61.0 Note: The increase in financing is equal to the sum of

spontaneous liabilities, planned external
$120.0 financing, and the planned addition to the retained
−$59.0 earnings account.

$0.0

$59.0
0.98
$60.5

the year, so the new interest

fter-tax impact that
uring the year.
or any projected LOC unless necessary.

se the plan does not call for any LOC, the average