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MM 5009 Financial Management INDIVIDUAL FINAL EXAM

Dynatronics, Inc

29111311

Haidir Afesina

MBA Executive 46

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS AND MANAGEMENT INSTITUT TEKNOLOGI BANDUNG 2012

Executive Summary Three electrical engineers in Burlington, Massachusetts in 1979, founded Dynatronics, a company that produce digital systems with several lines of proprietary items sold as components. It had enjoyed considerable success and expanded its business to variety of special-purpose system that applied digital techniques to computing, information handling, control tasks and data processing as the increasing of customer demand. Nevertheless, the company faced financial problems during the reviewing before the introduction of new product line. The company`s financing opportunities were severely restricted by its current financial position and the external financing possibilities was continued reliance on the reinvestment of earnings with no payment of dividends. It had reached the limit of the credit line that the bank was willing to extend in the absence of some improvement in the company`s capital structure. In addition the retention of company`s earning from the products failed to alter the bank`s stand on additional financing. Therefore Ms. Liz Kraft, CFO at Dynatronics believed that any major investment would create further financing pressure. Thus she has to decide its future investment and financing programs to be recommend to the shareholders. The case highlights issues on inventory system, policy, introduction of new products and external financing needed posed by growth. It also illustrated how varying assumptions can affect the perceived value of a project itself. The analysis will cover the existing financial performance, proforma and capital structure. It conclude that the best possible way for Dynatronics are invest on new product line with E investment policy, also getting its external financing with the maximum composition 58% debt (bank loan) and 42% IPO (equity). However, the company has to change its no dividends policy in order to apply the IPO.

Current Situation Due to its expansion, proprietary production had been shifted to Puerto Rico because of low wage labor force in that area. Then the sales outlets had been established in Silicon Valley along with small plant for the design and production of aerospace industry. Short-term loans, secured by the pledge of receivables were obtained from the local bank to support this growing requirement. Regardless extremely competition that made the product lifecycles had been cut short to 6-7 year cycle, the product almost trebled the sales so that the company`s investment in current asset expanded accordingly. The forecast for year-end 1989 current asset has been prepared to help in assessing the company`s immediate financing problem. a) The growth prospects assumed; Sales: $34 million Cost of good sold: $20,74 million Receivables: 22% (sales of raw material and work in process a four week`s rate of usage) The bank would lend up 90% of the account receivables balances outstanding. The interest rate charged rises to be 15.5% b) The introduction of new product line assumed contribute to sales: $5 million in 1990 and $6.5 million in 1991 $250.000 million (specialize equipment) $90,000 (budget allocation) c) External financing: Bank loan Issue up to 400,000 shares new common stock ($5 per share from $6.5 after costs and expenses) d) Inventory investment Frequent delivery delays with five possibility inventories policies Objectives 1. To determine the financing requirements posed by growth, change of inventory policy, and introduction of new product 2. To choose the best method of financing the production Problems The company`s financing opportunities were severely restricted by its current financial position and the external financing possibilities was continued reliance on the reinvestment of earnings with no payment of dividends. 2

Analysis The steps to be taken in order to solve the problems are: 1. Current financial performance analysis 2. Proforma analysis 3. Capital structure analysis 1. Current performance analyses According to Gitman and Zutter (2012), it is to identify financial strengths and weaknesses and evaluate financial performance in relation to the industry performance as a whole, and acquire useful information concerning competitors. The analyses are using CAGR (Compound Annual Growth Rates) and ROE (Return on Equity). a. CAGR (Compound Annual Growth Rates) Gitman and Zutter (2012) defined CAGR as average growth rate over a period of several years. The sales data from 1986 to 1988 is being using to get the growth percentage.

Year Net Sales

1986 $9,040

1987 $13,860

1988 $26,598

The CAGR sales growth is 43%. It is considered good prospects for Dynatronics. The data showed the shareholder that the demands for a companys products were increasing in the last three years. Means there is a promising growth in the future. b. ROE (Return on Equity) Gitman and Zutter (2012) stated that ROE as an important variable that determine earning growth and dividend growth that reveals how much profit a company earned in comparison to the total amount of shareholder equity found on the balance sheet. Below is the calculation of ROE component calculation using dupont analysis.

Table 1.1 Dupont`s ROE calculation Formula Net Profit Margin TATO ROA Earning available for common stockholders/sales Sales/Total Assets Net Profit Margin x TATO Total Assets/Common Stock Equity; Total Asset = Total Current Liabilities + Total Stockholders Equity ROA x FLM 1986 0.17% 2.38% 0.39% 1987 2.25% 2.28% 5.12% 1988 2.88% 2.55% 7.33%

FLM ROE

4.79%

7.41

11.60%

Having ROA 7.33% and always increases in the past 3 years means high return to total of investment. Figure 1.1 ROE

The chart shown that Dynatronics as the highest return on equity among the competitor in 1988. It increased annually. Ross, Westerfield, Jaffe and Jordan (2008) stated that the company more likely to be one that is capable of generating cash internally and high return for the shareholders. For the most part, the higher a company's return on equity compared to its industry, the better the company is.

2. Proforma analysis According to Gitman and Zutter (2012), proforma analysis help the company to know how much financing might be needed, and when it might be needed with an estimate of future income statement and balance sheet accounts, which are projected or forecast. Two inputs that required for preparing pro forma statement are financial statement for the previous year and the sales forecast for the coming year. Both of proforma income statement and balance sheet usually used to plan the future financial performance of a company. The forecasting process was mainly based on the companys sales growth using the sales growth assumption and then the Dynatronics`s proforma income statement and balance sheet are generated (Ross, Westerfield, Jaffe and Jordan, 2008) a) Proforma Balance Sheet From the proforma balance sheet accounts, the data is being used to forecast the amount of the external financing required. It reflects the goals and objectives of Dynatronics for the planning period. The details of the data can be found on the appendix 2.1.

Table 2.1 External Financing Required NO 1 2 3 4 5 6 7 8 9 10 11 12 Alternative NN NA NB NC ND NE YN YA YB YC YD YE Description No Invest New Product Line & Inventory Policy 1989 No Invest New Product Line & Inventory Policy A No Invest New Product Line & Inventory Policy B No Invest New Product Line & Inventory Policy C No Invest New Product Line & Inventory Policy D No Invest New Product Line & Inventory Policy E Invest New Product Line & Apply Inventory Policy 1989 Invest New Product Line & Apply Inventory Policy A Invest New Product Line & Apply Inventory Policy B Invest New Product Line & Apply Inventory Policy C Invest New Product Line & Apply Inventory Policy D Invest New Product Line & Apply Inventory Policy E External Financing Required (1989) $2,093 $2,285 $2,626 $3,081 $3,649 $4,161 $2,293 $2,485 $2,826 $3,281 $3,849 $4,361

The table showed that YE (invest new product line and apply inventory policy E) as the alternative that need the most of external financing.

b) Proforma Income Statement The method for developing a pro forma income statement is the percent of sales method in 3 years i.e. 1989-1991. It forecast sales and then expenses the various income statement items as percentages of projected sales. The details of the calculation is on appendix 2.2. Table 2.2 Key points on alternatives Altern ative

Sales/Revenue ($000) 1989 1990 40,000 40,400 40,896 41,283 41,524 41,623 45,000 45,400 45,896 46,283 46,524 46,623 1991 40,000 40,400 40,896 41,283 41,524 41,623 46,500 46,900 47,396 47,783 48,024 48,123

Total Expenses ($000) 1989 32,303 32,444 32,617 32,757 32,849 32,886 32,393 32,534 32,707 32,847 32,939 32,976 1990 37,977 38,087 38,222 38,338 38,421 38,454 42,732 42,795 42,873 42,941 42,989 43,008 1991 37,977 38,087 38,222 38,338 38,421 38,454 44,141 44,193 44,258 44,316 44,358 44,375

Earning Per Share 1989 0.57 0.66 0.77 0.85 0.90 0.92 0.54 0.63 0.74 0.82 0.87 0.89 1990 0.68 0.78 0.90 0.99 1.05 1.07 0.76 0.88 1.02 1.13 1.19 1.22 1991 0.68 0.78 0.90 0.99 1.05 1.07 0.80 0.91 1.06 1.17 1.24 1.26

NN NA NB NC ND NE YN YA YB YC YD YE

34,000 34,400 34,896 35,283 35,524 35,623 34,000 34,400 34,896 35,283 35,524 35,623

YE has the highest earning share ($1.26), thus it is a good investment for the investors c) Proforma Cash Flow Gitman and Zutter (2012) stated that proforma cash flow helps to predict the best possible investment on the project using the highest NPV that gives explicit consideration to the time value of money. The steps are using total fix assets (proforma balance sheet), operating cash flow, and 15.5% (prime 11.5% + 4%) for the interest rates annually.

Table 1.3 NPV NO 1 2 3 4 5 6 7 8 9 10 11 12 Alternative NN NA NB NC ND NE YN YA YB YC YD YE Description No Invest New Product Line & Inventory Policy 1989 No Invest New Product Line & Inventory Policy A No Invest New Product Line & Inventory Policy B No Invest New Product Line & Inventory Policy C No Invest New Product Line & Inventory Policy D No Invest New Product Line & Inventory Policy E Invest New Product Line & Apply Inventory Policy 1989 Invest New Product Line & Apply Inventory Policy A Invest New Product Line & Apply Inventory Policy B Invest New Product Line & Apply Inventory Policy C Invest New Product Line & Apply Inventory Policy D Invest New Product Line & Apply Inventory Policy E NPV $1,374.4 $2,037.5 $2,445.2 $2,753.6 $2,935.4 $3,010.8 $1,701.5 $2,066.8 $2,519.5 $2,866.1 $3,075.5 $3,161.9

The table showed the amount of NPV with acceptable projects, and thereby increasing the value of the firm. Alternative YE (invest new product line and apply inventory policy E) has the highest resulting NPV. Means YE is the most profitable one. 3. Capital Structure The capital structure is how a firm finances its overall operations and growth by using different sources of funds (Gitman and Zutter, 2012). Dynatronics financial source are coming from bank loan and IPO. The maximum external financing fund: 1. Debt (from bank up to 90% account receivables, 15.5% interest rate annually): $6732 (77%) 2. IPO 400,000 share ($6.5 price per common stock) assumption cannot be more that $8732. The next step is the optimization of debt and equity composition using WACC. Gitman and Zutter (2012) stated that WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. : $2000 (23%) The total maximum possible external financing are $8732. It means that any chosen investment

Table 3.1 Capital Structure Analysis using YE ($000, except number of outstanding shares)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Debt in capital structure * Earnings before interest and taxes(EBIT) Interest Profit Before Taxes (PBT) Taxes(40%) Profit after taxes (PAT) Dividends(DIV)*** Payment to security holder (3)+(7) Cost of debt: Kd** Required return on equity: Ke**** Market value of debt Vd. (3)/(9) Market value of equity Ve. (7)/(10) Market value of the firm Vf.(11)+(12) Book value of debt, BVd Book value of equity, BVe Book value of the firm, BVf Return on Total Capital ROTC(ROA) = EBIT(1T)/(16) Return on equity = (6)/(15) 0% $3,162 0 $3,162 $1,265 $1,897 $190 190 13.69% 53% 0 356 356 0 $4,361 $4,361 10% $3,162 $66 $3,095 $1,238 $1,857 $186 252 15.24% 53.78% $436 345 $781 436 $3,925 $4,361 40% $3,162 $347 $2,815 $1,126 $1,689 $169 516 19.89% 55.28% $1,744 305 $2,050 1744 $2,617 $4,361 50% $3,162 $467 $2,694 $1,078 $1,616 $162 629 21.44% 55.78% $2,181 290 $2,470 2181 $2,181 $4,361 58% $3,162 $574 $2,588 $1,035 $1,553 $155 729 22.68% 56.18% $2,529 276 $2,806 2529 $1,832 $4,361 60% $3,162 $602 $2,560 $1,024 $1,536 $154 755 22.99% 56.28% $2,617 273 $2,890 2617 $1,744 $4,361 95% $3,162 $1,177 $1,984 $794 $1,191 $119 1296 28.42% 58.03% $4,143 205 $4,348 4143 $218 $4,361

17 18

43.50% 43.50%

43.50% 47.32%

43.50% 64.54%

43.50% 74.13%

43.50% 84.77%

43.50% 88.05%

43.50% 546.03%

19 20 21 22 23 24 25 26

Number of outstanding shares, N ***** Price per share, P (12)/(19) Earnings per share, EPS. (6)/(19) Price-earnings ratio, PER (20)/(21) Book value debt ratio (14)/(16) Market value debt ratio (11)/(13) Weighted average cost of capital (WACC) Free cash flow, FCF = EBIT (1-T)

1,780,465 0.20 1.07 0.19 0 0 53.28% $1,897

1,602,419 0.22 1.16 0.19 10% 55.81% 28.87% $1,897

1,068,279 0.29 1.58 0.18 40% 85.10% 18.39% $1,897

890,233 0.33 1.82 0.18 50% 88.27% 17.90% $1,897

747,795 0.37 2.08 0.18 58% 90.15% 17.80% $1,897

712,186 0.38 2.16 0.18 60% 90.56% 17.80% $1,897

89,023 2.30 13.37 0.17 95% 95.28% 18.98% $1,897

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Market value of the firm (26)/(25)

$3,560

$6,571

$10,313

$10,598

$10,656

$10,653

$9,993

*Calculated using book value weights for debt & equity ** Using 10-year BB corporate bonds in Table.B form 0% debt, use assumption in next % (percentage * 15.5% bank interest rate) because in 1989, Dynatronics is high-risk customer from bank perspective. *** Dividends estimate for 10% from PAT **** Using growth-rate, with g=CAGR from 1986-1988, D payed 10% from common stock price $6.5 ***** (1-% of Debt)* N with 100% equity without debt in Table Proforma Balance Sheet with New Line Product + Inventory Policy E

YE (invest new product with inventory policy E) has the most external financing required ($4,361) and the highest NPV ($3,161,9), thus YE is being used for the capital structure analysis. From the WACC calculation (0-100% debt), the lowest WACC is 17.80% with highest market value of $10,656.

From the chart above, it is showed that the optimum external financing required at Debt (58%) and Equity (42%). The detail of the WACC calculation is on appendix 5

Conclusion From the all the analysis above and summarized on the table below, it concludes; 1. YE is the only one investment that has the best assumption that resulting highest NPV`s 2. YE is the highest external financing required compare to others. 3. The minimum WACC is 17.80% with market value $10,656. 4. The composition of debt is 58% and equity is 42% External Financing Required ('89) $2,093.0 $2,285.0 $2,626.0 $3,081.0 $3,649.0 $4,161.0 $2,293.0 $2,485.0 $2,826.0 $3,281.0 $3,849.0 $4,361.0

NO 1 2 3 4 5 6 7 8 9 10 11 12

Altern atives NN NA NB NC ND NE YN YA YB YC YD YE

Description No Invest New Product Line & Inventory Policy 1989 No Invest New Product Line & Inventory Policy A No Invest New Product Line & Inventory Policy B No Invest New Product Line & Inventory Policy C No Invest New Product Line & Inventory Policy D No Invest New Product Line & Inventory Policy E Invest New Product Line & Apply Inventory Policy 1989 Invest New Product Line & Apply Inventory Policy A Invest New Product Line & Apply Inventory Policy B Invest New Product Line & Apply Inventory Policy C Invest New Product Line & Apply Inventory Policy D Invest New Product Line & Apply Inventory Policy E

NPV $1,710.3 $2,037.5 $2,445.2 $2,753.6 $2,935.4 $3,010.8 $1,701.5 $2,066.8 $2,519.5 $2,866.1 $3,075.5 $3,161.9

Recommendation The recommendations that Ms. Kraft should be given to the shareholders are: 1. Investment to the new product line for year 1989 1991 2. Choose the E inventory policy It has the highest NPV with the highest external financing required 3. Apply both of external financing required with the lowest WACC and the highest market value. The composition of debt from the bank loan is 58%, and equity through IPO is 42%. In order to fit with the external finance required allocation ($4361), the composition of the maximum exactly amount are: Equity (42%) : $1,832,000 (with 5$ price per common stock) Debt (58%) : $2,529,000 4. To apply the IPO, the company has to change the no dividend policy. Otherwise it will not get the highest market value.

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References

Gitman, Lawrence J and Zutter, Chad J (2012) Principal of Managerial Finance (13th Ed) Boston: Prentice Hall Ross, Stephen A, Westerfield, Randolp W, Jaffe, Jeffrey and Jordan, Bradford D (2008) Modern Financial Management Chicago: McGraw Hill Higher Education http://www.investopedia.com/terms/c/capitalstructure.asp#axzz2DE5fA6Ni (last accessed: 25/11/2012 at 9pm) http://www.investopedia.com/terms/w/wacc.asp#axzz2DE5fA6Ni (last accessed: 25/11/2012 at 9pm) http://www.investopedia.com/terms/c/cashflow.asp#axzz2DE5fA6Ni (last accessed: 25/11/2012 at 9pm)

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Appendix 1. Existing Financial Performance


Exhibit 1 Income Statement 1986 1987 1988 Net sales $ 9.040 $ 13.860 $ 26.593 Cost of goods sold 5.920 8.870 16.221 Gross profit 3.120 4.990 10.372 Research and Development 1.055 1.455 2.743 Selling, general and administrative 1.955 2.911 5.940 Income from operations 110 624 1.689 Interest expense 75 100 393 Other expenses** 13 5 20 Pretax income 23 519 1.276 Income taxes* 8 208 510 Profit after tax 15 311 766 Earnings/share 0,01 0,19 0,43 *After 1986, Dynatronics' effective income tax rate at the federal and state level was 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3)
Exhibit 2 Balance Sheet December 31 1986 1987 1988 $ 305 $ 400 $ 502 1.733 3.150 5.638 320 468 610 20 3.456 $ 530 180 350 $ 3.806 $ 960 398 323 23 50 1.754 $ 795 1.215 43 2.053 $ 3.807 $ 497 930 816 1.343 736 1.018 33 60 5.632 $ 9.491 745 1.343 300 388 445 $ 955 6.077 $ 10.446 2.161 621 444 200 255 3.681 $ 4.537 1.210 811 303 400 7.261

Period 1986-1988

Cash Accounts receivable Inventories Raw materials Work in process Finished goods Prepaid expenses Total current assets Gross fixed assets Less: accumulated depreciation Net fixed assets Total assets Notes Payable** Accounts payable Accrued expenses Provision for taxes Other Total current liabilities Common stock ($.50 par value) Paid-in surplus Retained earnings Total stockholders' equity Total liabilities and net worth

$ $

$ $

820 900 1.223 1.164 354 1.119 2.397 $ 3.183 6.078 $ 10.444 1.799.365

Number of shares outstanding 1.590.215 **Secured by accounts receivable.

1.637.805

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Period 1986-1988 CAGR ROE 1986 1987 1988 Net Profit Margin 1986 1987 1988 TATO 1986 1987 1988 ROA / ROI 1986 1987 1988 FLM 1986 1987 1988

Value 43,28%

Note

AMP Inc Analog Devices Inc Dynatech Corporation

0,007 Positive behaviour where 1986-1988 increase. in 1988, the highest 0,13 compare to other competitor. But, ROE high come from high FLM which 0,24 more contribute from high long-term debt

0,145 0,185 0,195

0,087 0,065 0,111

0,188 0,161 0,15

0,17% 2,25% 2,88%

2,38 2,28 2,55

0,39% 5,12% 7,33%

4,79 7,41 11,60 Total Current Liabities($7,261) > Total Stockholders Equity($3,183)

Net Profit Margin= TATO= ROA = FLM = ROE =

Earning available for common stockholders/sales sales/Total Assets Net Profit Margin x TATO Total Assets/Common Stock Equity; Total Asset = Total Current Liabilities + Total Stockholders Equity ROA x FLM

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2. Proforma Balance Sheet 2.1 No New Product Line


NN Proforma Balance Sheet 1989 without new product line ($000s) December 31 1986 1987 1988 1989 $ 305 $ 400 $ 502 $ 680 1.733 3.150 5.638 7.480 320 468 610 20 3.456 $ 530 180 350 $ 3.806 $ 960 398 323 23 50 1.754 $ 795 1.215 43 2.053 $ 3.807 $ 497 816 736 33 5.632 $ 745 300 445 $ 6.077 $ 2.161 621 444 200 255 3.681 $ 820 1.223 354 2.397 $ 6.078 $ 930 1.343 1.018 60 9.491 $ 1.343 388 955 $ 10.446 $ 4.537 1.210 811 303 400 7.261 $ 900 1.164 1.119 3.183 $ $ 10.444 $ 1.182 1.721 830 77 11.970 955 388 567 12.537 4.537 1.210 811 303 400 7.261 900 1.164 1.119 3.183 2.093 12.537

Cash Accounts receivable Inventories Raw materials Work in process Finished goods Prepaid expenses Total current assets Gross fixed assets Less: accumulated depreciation Net fixed assets Total assets Notes Payable** Accounts payable* Accrued expenses* Provision for taxes* Other* Total current liabilities Common stock ($.50 par value)* Paid-in surplus* Retained earnings* Total stockholders' equity* External Financing Required Total liabilities and net worth

$ $

$ $

Number of shares outstanding*** 1.590.215 1.637.805 1.799.365 **Secured by accounts receivable & assumption same with 1988 * Assumption same with 1988 (same condition with other scenario) *** Profit After Tax/ Earning per Share(same condition with other scenario)

1.780.465

14

NA

Proforma Balance Sheet 1989 Inventory policy A (only) ($000s) December 31 1986 1987 1988 1989 $ 305 $ 400 $ 502 $ 680 1.733 3.150 5.638 7.480 320 468 610 20 3.456 $ 530 180 350 $ 3.806 $ 960 398 323 23 50 1.754 $ 795 1.215 43 2.053 $ 3.807 $ 497 930 816 1.343 736 1.018 33 60 5.632 $ 9.491 $ 745 1.343 300 388 445 $ 955 $ 6.077 $ 10.446 $ 2.161 621 444 200 255 3.681 $ 820 1.223 354 2.397 $ 4.537 1.210 811 303 400 7.261 $ 1.182 1.721 1.022 77 12.162 955 388 567 12.729 4.537 1.210 811 303 400 7.261 900 1.164 1.119 3.183 2.285 12.729

Cash Accounts receivable Inventories Raw materials Work in process Finished goods Prepaid expenses Total current assets Gross fixed assets Less: accumulated depreciation Net fixed assets Total assets Notes Payable** Accounts payable* Accrued expenses* Provision for taxes* Other* Total current liabilities Common stock ($.50 par value)* Paid-in surplus* Retained earnings* Total stockholders' equity* External Financing Required Total liabilities and net worth

$ $

$ $

900 1.164 1.119 3.183 $ $ 6.078 $ 10.444 $

Number of shares outstanding*** 1.590.215 1.637.805 1.799.365 1.780.465 **Secured by accounts receivable & assumption same with 1988 * Assumption same with 1988 (same condition with other scenario) *** Profit After Tax/ Earning per Share(same condition with other scenario)

15

NE

Proforma Balance Sheet 1989 Inventory Policy E ($000s) December 31 1986 1987 1988 1989 $ 305 $ 400 $ 502 $ 680 1.733 3.150 5.638 7.480 320 468 610 20 3.456 $ 530 180 350 $ 3.806 $ 960 398 323 23 50 1.754 $ 795 1.215 43 2.053 $ 3.807 $ 497 816 736 33 5.632 $ 745 300 445 $ 6.077 $ 2.161 621 444 200 255 3.681 $ 820 1.223 354 2.397 $ 6.078 $ 930 1.343 1.018 60 9.491 $ 1.343 388 955 $ 10.446 $ 4.537 1.210 811 303 400 7.261 $ 900 1.164 1.119 3.183 $ $ 10.444 $ 1.182 1.721 2.898 77 14.038 955 388 567 14.605 4.537 1.210 811 303 400 7.261 900 1.164 1.119 3.183 4.161 14.605

Cash Accounts receivable Inventories Raw materials Work in process Finished goods Prepaid expenses Total current assets Gross fixed assets Less: accumulated depreciation Net fixed assets Total assets Notes Payable** Accounts payable* Accrued expenses* Provision for taxes* Other* Total current liabilities Common stock ($.50 par value)* Paid-in surplus* Retained earnings* Total stockholders' equity* External Financing Required Total liabilities and net worth

$ $

$ $

Number of shares outstanding*** 1.590.215 1.637.805 1.799.365 1.780.465 **Secured by accounts receivable & assumption same with 1988 * Assumption same with 1988 (same condition with other scenario) *** Profit After Tax/ Earning per Share(same condition with other scenario)

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2.2 With New Product Line


YN Proforma Balance Sheet 1989 Invest New Product Line ($000s) December 31 1986 1987 1988 1989 $ 305 $ 400 $ 502 $ 680 1.733 3.150 5.638 7.480 320 468 610 20 3.456 $ 530 180 350 $ 3.806 $ 960 398 323 23 50 1.754 $ 795 1.215 43 2.053 $ 3.807 $ 497 816 736 33 5.632 $ 745 300 445 $ 6.077 $ 2.161 621 444 200 255 3.681 $ 820 1.223 354 2.397 $ 6.078 $ 930 1.343 1.018 60 9.491 $ 1.343 388 955 $ 10.446 $ 4.537 1.210 811 303 400 7.261 $ 900 1.164 1.119 3.183 $ $ 10.444 $ 1.182 1.721 830 77 11.970 1.205 438 767 12.737 4.537 1.210 811 303 400 7.261 900 1.164 1.119 3.183 2.293 12.737

Cash Accounts receivable Inventories Raw materials Work in process Finished goods Prepaid expenses Total current assets $ Gross fixed assets* Less: accumulated depreciation*** Net fixed assets $ Total assets $ Notes Payable** Accounts payable Accrued expenses Provision for taxes Other Total current liabilities Common stock ($.50 par value) Paid-in surplus Retained earnings Total stockholders' equity External Financing Required Total liabilities and net worth

$ $

Number of shares outstanding 1.590.215 1.637.805 1.799.365 **Secured by accounts receivable & assumption same with 1988 * Additional Specialized equipment cost $250,000 *** Accumulated Depreciation for specialized Equipment (Table C) Max Note Payable from Factoring Division of Bank(000 thousands) $ 6.732 Max new equity from IPO(000 thousands) $ 2.000 Total External Financing $ 8.732

1.780.465

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3. Proforma Income Statement 3.1 No new product line


NN Pro Forma - Income Statement '89-'91 - Without New Product Line (thousands dollars)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative Income from operations Interest expense*** Other expenses** Pretax income Income taxes* Profit after tax Earnings/share $ 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative Income from operations Interest expense*** Other expenses** Pretax income Income taxes* Profit after tax Earnings/share 1986 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 9.040 $ 13.860 $ 26.593 $ 34.000 $ 40.000 $ 40.000 16.221 $ 20.740 $ 24.400 $ 24.400 10.372 $ 13.260 $ 15.600 $ 15.600 2.743 $ 5.940 $ 1.689 $ 393 $ 20 $ 1.276 $ 510 $ 766 $ 0,43 $ 3.507 $ 7.594 $ 2.159 $ 393 $ 69 $ 1.697 $ 679 $ 1.018 $ 0,57 $ 4.126 $ 8.935 $ 2.539 $ 393 $ 124 $ 2.023 $ 809 $ 1.214 $ 0,68 $ 4.126 8.935 2.539 393 124 2.023 809 1.214 0,68

NA

Pro Forma Income Statement 89-91 Inventory Policies A (only) (thousands dollars)
1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 34.400 $ 40.400 $ 40.400 16.221 $ 20.740 $ 24.357 $ 24.357 10.372 $ 13.660 $ 16.043 $ 16.043 2.743 $ 3.548 $ 4.167 $ 4.167 5.940 $ 7.684 $ 9.024 $ 9.024 1.689 $ 2.428 $ 2.851 $ 2.851 393 $ 393 $ 393 $ 393 20 $ 510 $ 0,43 $ 79 $ 782 $ 0,66 $ 146 $ 925 $ 0,78 $ 146 925 0,78 1.276 $ 1.956 $ 2.313 $ 2.313 766 $ 1.174 $ 1.388 $ 1.388

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) *** Assumption same w ith 1988

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) *** Assumption same w ith 1988

NB

Pro Forma Income Statement 89-91 Inventory Policies B (only) (thousands dollars)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative Income from operations Interest expense*** Other expenses** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991

NC

Pro Forma Income Statement 89-91 Inventory Policies C (only) (thousands dollars)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative Income from operations Interest expense*** Other expenses** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 35.283 $ 41.283 $ 41.283 16.221 $ 20.740 $ 24.267 $ 24.267 10.372 $ 14.543 $ 17.016 $ 17.016 2.743 $ 3.639 $ 4.258 $ 4.258 5.940 $ 7.881 $ 9.221 $ 9.221 1.689 $ 3.023 $ 3.537 $ 3.537 393 $ 393 $ 393 $ 393 20 $ 104 $ 198 $ 198 1.276 $ 2.526 $ 2.945 $ 2.945 510 $ 1.010 $ 1.178 $ 1.178 766 $ 1.516 $ 1.767 $ 1.767 0,43 $ 0,85 $ 0,99 $ 0,99

(thousands dollars)

$ 9.040 $ 13.860 $ 26.593 $ 34.896 $ 40.896 $ 40.896 16.221 $ 20.740 $ 24.306 $ 24.306 10.372 $ 14.156 $ 16.590 $ 16.590 2.743 $ 3.599 $ 4.218 $ 4.218 5.940 $ 7.795 $ 9.135 $ 9.135 1.689 $ 2.762 $ 3.237 $ 3.237 393 $ 393 $ 393 $ 393 20 $ 510 $ 0,43 $ 90 $ 170 $ 170 1.276 $ 2.279 $ 2.674 $ 2.674 911 $ 1.070 $ 1.070 0,77 $ 0,90 $ 0,90 766 $ 1.367 $ 1.604 $ 1.604

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) *** Assumption same w ith 1988

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) *** Assumption same w ith 1988

ND (thousands dollars)

Pro Forma Income Statement 89-91 Inventory Policies D (only) (thousands dollars)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative Income from operations Interest expense*** Other expenses** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991

NE

Pro Forma Income Statement 89-91 Inventory Policies E (only) (thousands dollars)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative Income from operations Interest expense*** Other expenses** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 35.623 $ 41.623 $ 41.623 16.221 $ 20.740 $ 24.233 $ 24.233 10.372 $ 14.883 $ 17.390 $ 17.390 2.743 $ 3.674 $ 4.293 $ 4.293 5.940 $ 7.957 $ 9.297 $ 9.297 1.689 $ 3.252 $ 3.799 $ 3.799 393 $ 393 $ 393 $ 393 20 $ 122 $ 237 $ 237 1.276 $ 2.737 $ 3.169 $ 3.169 510 $ 1.095 $ 1.268 $ 1.268 766 $ 1.642 $ 1.901 $ 1.901 0,43 $ 0,92 $ 1,07 $ 1,07

$ 9.040 $ 13.860 $ 26.593 $ 35.524 $ 41.524 $ 41.524 16.221 $ 20.740 $ 24.243 $ 24.243 10.372 $ 14.784 $ 17.281 $ 17.281 2.743 $ 3.664 $ 4.283 $ 4.283 5.940 $ 7.935 $ 9.275 $ 9.275 1.689 $ 3.185 $ 3.723 $ 3.723 393 $ 393 $ 393 $ 393 20 $ 117 $ 226 $ 226 1.276 $ 2.675 $ 3.103 $ 3.103 510 $ 1.070 $ 1.241 $ 1.241 766 $ 1.605 $ 1.862 $ 1.862 0,43 $ 0,90 $ 1,05 $ 1,05

*After 1986, Dynatronics' effective income tax rate at the federal and state level was 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) *** Assumption same with 1988

*After 1986, Dynatronics' effective income tax rate at the federal and state level was 40% ** Include Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) *** Assumption same with 1988

18

3.2 With new poduct line


YN Pro Forma Income Statement 89-91 Invest New Product Line (only) (thousands dollars)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative** Income from operations Interest expense**** Other expenses*** Pretax income Income taxes* Profit after tax Earnings/share $ 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative** Income from operations Interest expense**** Other expenses*** Pretax income Income taxes* Profit after tax Earnings/share 9.040 $ 13.860 $ 26.593 $ 34.000 $ 45.000 $ 46.500 16.221 $ 20.740 $ 27.450 $ 28.365 10.372 $ 13.260 $ 17.550 $ 18.135 2.743 $ 5.940 $ 1.689 $ 393 $ 20 $ 1.276 $ 510 $ 766 $ 0,43 $ 3.507 $ 2.069 $ 393 $ 69 $ 1.607 $ 643 $ 964 $ 0,54 $ 4.642 $ 2.738 $ 393 $ 77 $ 2.268 $ 907 $ 1.361 $ 0,76 $ 4.796 2.829 393 77 2.359 944 1.415 0,80 7.684 $ 10.171 $ 10.510

YA

Pro Forma Income Statement 89-91 Invest New Product Line + Inventory Policies A (thousands dollar)
1986 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 34.400 $ 45.400 $ 46.900 16.221 $ 20.740 $ 27.372 $ 28.276 10.372 $ 13.660 $ 18.028 $ 18.624 2.743 $ 3.548 $ 4.683 $ 4.838 5.940 $ 7.774 $ 10.260 $ 10.599 1.689 $ 2.338 $ 3.085 $ 3.187 393 $ 393 $ 393 $ 393 20 $ 510 $ 0,43 $ 79 $ 87 $ 87 1.276 $ 1.866 $ 2.605 $ 2.707 746 $ 1.042 $ 1.083 0,63 $ 0,88 $ 0,91 766 $ 1.120 $ 1.563 $ 1.624

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Additional $90,000 from normal allocation *** Additional $250,000 for specialized equipment and Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) **** Assumption same w ith 1988

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Additional $90,000 from normal allocation *** Additional $250,000 for specialized equipment and Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) **** Assumption same w ith 1988

YB

ands dollar)

Pro Forma Income Statement 89-91 Invest New Product Line + Inventory Policies B (thousands dollar)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative** Income from operations Interest expense**** Other expenses*** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 34.896 $ 45.896 $ 47.396 16.221 $ 20.740 $ 27.278 $ 28.169 10.372 $ 14.156 $ 18.618 $ 19.227 2.743 $ 3.599 $ 4.734 $ 4.889 5.940 $ 7.885 $ 10.370 $ 10.709 1.689 $ 2.672 $ 3.514 $ 3.629 393 $ 393 $ 393 $ 393 20 $ 510 $ 0,43 $ 90 $ 99 $ 99 1.276 $ 2.189 $ 3.023 $ 3.138 875 $ 1.209 $ 1.255 0,74 $ 1,02 $ 1,06 766 $ 1.313 $ 1.814 $ 1.883

YC

Pro Forma Income Statement 89-91 Invest New Product Line + Inventory Policies C (thousands dollar)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative** Income from operations Interest expense**** Other expenses*** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 35.283 $ 46.283 $ 47.783 16.221 $ 20.740 $ 27.206 $ 28.088 10.372 $ 14.543 $ 19.077 $ 19.695 2.743 $ 3.639 $ 4.774 $ 4.929 5.940 $ 7.971 $ 10.456 $ 10.795 1.689 $ 2.933 $ 3.847 $ 3.972 393 $ 393 $ 393 $ 393 20 $ 510 $ 0,43 $ 104 $ 112 $ 112 1.276 $ 2.436 $ 3.342 $ 3.467 974 $ 1.337 $ 1.387 0,82 $ 1,13 $ 1,17 766 $ 1.462 $ 2.005 $ 2.080

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Additional $90,000 from normal allocation **** Assumption same w ith 1988

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Additional $90,000 from normal allocation **** Assumption same w ith 1988

g, and Insurance Costs (Exhibit*** Additional $250,000 for specialized equipment and Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) 3) *** Additional $250,000 for specialized equipment and Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit

YD

housands dollar)

Pro Forma Income Statement 89-91 Invest New Product Line + Inventory Policies D (thousands dollar)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative** Income from operations Interest expense**** Other expenses*** Pretax income Income taxes* Profit after tax Earnings/share 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 $ 9.040 $ 13.860 $ 26.593 $ 35.524 $ 46.524 $ 48.024 16.221 $ 20.740 $ 27.162 $ 28.038 10.372 $ 14.784 $ 19.362 $ 19.986 2.743 $ 3.664 $ 4.799 $ 4.954 5.940 $ 8.025 $ 10.510 $ 10.849 1.689 $ 3.095 $ 4.053 $ 4.184 393 $ 393 $ 393 $ 393 20 $ 117 $ 125 $ 125 1.276 $ 2.585 $ 3.535 $ 3.666 510 $ 1.034 $ 1.414 $ 1.466 766 $ 1.551 $ 2.121 $ 2.200 0,43 $ 0,87 $ 1,19 $ 1,24

YE

Pro Forma Income Statement 89-91 Invest New Product Line + Inventory Policies E (thousands dollar)
1986 Net sales Cost of goods sold Gross profit Research and Development Selling, general and administrative** Income from operations Interest expense**** Other expenses*** Pretax income Income taxes* Profit after tax Earnings/share $ 5.920 3.120 1.055 1.955 110 75 13 23 8 15 0,01 1987 8.870 4.990 1.455 2.911 624 100 5 519 208 311 0,19 1988 4/29/89 1990 1991 9.040 $ 13.860 $ 26.593 $ 35.623 $ 46.623 $ 48.123 16.221 $ 20.740 $ 27.144 $ 28.018 10.372 $ 14.883 $ 19.479 $ 20.105 2.743 $ 5.940 $ 1.689 $ 393 $ 20 $ 1.276 $ 510 $ 766 $ 0,43 $ 3.674 $ 3.162 $ 393 $ 122 $ 2.647 $ 1.059 $ 1.588 $ 0,89 $ 4.809 $ 4.138 $ 393 $ 130 $ 3.615 $ 1.446 $ 2.169 $ 1,22 $ 4.964 4.271 393 130 3.748 1.499 2.249 1,26 8.047 $ 10.532 $ 10.871

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Additional $90,000 from normal allocation **** Assumption same w ith 1988

*After 1986, Dynatronics' effective income tax rate at the federal and state level w as 40% ** Additional $90,000 from normal allocation **** Assumption same w ith 1988

Handling, and Insurance Costs (Exhibit 3) *** Additional $250,000 for specialized equipment and Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) Additional $250,000 for specialized equipment and Annual Combined Setup, Warehouse, Handling, and Insurance Costs (Exhibit 3) ***

19

4. Proforma Cash Flow


Cash Flow Projection '89-'91 - Without New Product Line + Inventory Policy Proforma 89 (thousands dollars) 1989 1990 1991 Revenue $ 34.000 $ 40.000 $ 40.000 Total Expense** $ 32.303 $ 37.977 $ 37.977 EBITDA $ 1.697 $ 2.023 $ 2.023 Depreciation $ 388 $ 388 $ 388 EBIT $ 1.309 $ 1.635 $ 1.635 Taxes(40%) $ 524 $ 654 $ 654 NOPAT $ 785 $ 981 $ 981 Depreciation $ 388 $ 388 $ 388 Operating Cash Flow $ (955) $ 1.173 $ 1.369 $ 1.369
Fix Asset Investment

Cash Flow Projection '89-'91 - Without New Product Line + Inventory Policy A (thousands dollars) 1989 1990 1991 Revenue $ 34.400 $ 40.400 $ 40.400 Total Expense** $ 32.444 $ 38.087 $ 38.087 EBITDA $ 1.956 $ 2.313 $ 2.313 Depreciation $ 388 $ 388 $ 388 EBIT $ 1.568 $ 1.925 $ 1.925 Taxes(40%) $ 627 $ 770 $ 770 NOPAT $ 941 $ 1.155 $ 1.155 Depreciation $ 388 $ 388 $ 388 Operating Cash Flow $ (955) $ 1.329 $ 1.543 $ 1.543
Fix Asset Investment

Interest Rate* NPV

15,5% 1.710

Interest Rate* NPV

15,5% 2.038

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

Cash Flow Projection '89-'91 - Without New Product Line + Inventory Policy B (thousands dollars) 1989 1990 1991 Revenue $ 34.896 $ 40.896 $ 40.896 Total Expense** $ 32.617 $ 38.222 $ 38.222 EBITDA $ 2.279 $ 2.674 $ 2.674 Depreciation $ 388 $ 388 $ 388 EBIT $ 1.891 $ 2.286 $ 2.286 Taxes(40%) $ 756 $ 914 $ 914 NOPAT $ 1.134 $ 1.372 $ 1.372 Depreciation $ 388 $ 388 $ 388 Operating Cash Flow $ (955) $ 1.522 $ 1.760 $ 1.760
Fix Asset Investment

Cash Flow Projection '89-'91 - Without New Product Line + Inventory Policy C (thousands dollars) 1989 1990 1991 Revenue $ 35.283 $ 41.283 $ 41.283 Total Expense** $ 32.757 $ 38.338 $ 38.338 EBITDA $ 2.526 $ 2.945 $ 2.945 Depreciation $ 388 $ 388 $ 388 EBIT $ 2.138 $ 2.557 $ 2.557 Taxes(40%) $ 855 $ 1.023 $ 1.023 NOPAT $ 1.283 $ 1.534 $ 1.534 Depreciation $ 388 $ 388 $ 388 Operating Cash Flow $ (955) $ 1.671 $ 1.922 $ 1.922
Fix Asset Investment

Interest Rate* 15,5% NPV $ 2.445 * using prime(11.5%) + 4% interest rate from factoring division ** R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

Interest Rate* NPV

15,5% 2.754

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

Cash Flow Projection '89-'91 - Without New Product Line + Inventory Policy D (thousands dollars) 1989 1990 1991 Revenue $ 35.524 $ 41.524 $ 41.524 Total Expense** $ 32.849 $ 38.421 $ 38.421 EBITDA $ 2.675 $ 3.103 $ 3.103 Depreciation $ 388 $ 388 $ 388 EBIT $ 2.287 $ 2.715 $ 2.715 Taxes(40%) $ 915 $ 1.086 $ 1.086 NOPAT $ 1.372 $ 1.629 $ 1.629 Depreciation $ 388 $ 388 $ 388 Operating Cash Flow $ (955) $ 1.760 $ 2.017 $ 2.017
Fix Asset Investment

Cash Flow Projection '89-'91 - Without New Product Line + Inventory Policy E (thousands dollars) 1989 1990 1991 Revenue $ 35.623 $ 41.623 $ 41.623 Total Expense** $ 32.886 $ 38.454 $ 38.454 EBITDA $ 2.737 $ 3.169 $ 3.169 Depreciation $ 388 $ 388 $ 388 EBIT $ 2.349 $ 2.781 $ 2.781 Taxes(40%) $ 940 $ 1.112 $ 1.112 NOPAT $ 1.409 $ 1.669 $ 1.669 Depreciation $ 388 $ 388 $ 388 Operating Cash Flow $ (955) $ 1.797 $ 2.057 $ 2.057
Fix Asset Investment

Interest Rate* NPV

15,5% 2.935

Interest Rate* NPV

15,5% 3.011

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

20

Cash Flow Projection '89-'91 - Invest New Product Line + Inventory Policy Proforma 89 (thousands dollars) 1989 1990 1991 Revenue $ 34.000 $ 45.000 $ 46.500 Total Expense** $ 32.393 $ 42.732 $ 44.141 EBITDA $ 1.607 $ 2.268 $ 2.359 Depreciation $ 438 $ 438 $ 438 EBIT $ 1.169 $ 1.830 $ 1.921 Taxes(40%) $ 468 $ 732 $ 768 NOPAT $ 701 $ 1.098 $ 1.153 Depreciation $ 438 $ 438 $ 438 Operating Cash Flow $ (1.205) $ 1.139 $ 1.536 $ 1.591
Fix Asset Investment

Cash Flow Projection '89-'91 - Invest New Product Line + Inventory Policy A (thousands dollars) 1989 1990 1991 Revenue $ 34.400 $ 45.400 $ 46.900 Total Expense** $ 32.534 $ 42.795 $ 44.193 EBITDA $ 1.866 $ 2.605 $ 2.707 Depreciation $ 438 $ 438 $ 438 EBIT $ 1.428 $ 2.167 $ 2.269 Taxes(40%) $ 571 $ 867 $ 908 NOPAT $ 857 $ 1.300 $ 1.362 Depreciation $ 438 $ 438 $ 438 Operating Cash Flow $ (1.205) $ 1.295 $ 1.738 $ 1.800
Fix Asset Investment

Interest Rate* NPV

15,5% 1.701

Interest Rate* NPV

15,5% 2.067

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

Cash Flow Projection '89-'91 - Invest New Product Line + Inventory Policy B (thousands dollars) 1989 1990 1991 Revenue $ 34.896 $ 45.896 $ 47.396 Total Expense** $ 32.707 $ 42.873 $ 44.258 EBITDA $ 2.189 $ 3.023 $ 3.138 Depreciation $ 438 $ 438 $ 438 EBIT $ 1.751 $ 2.585 $ 2.700 Taxes(40%) $ 700 $ 1.034 $ 1.080 NOPAT $ 1.050 $ 1.551 $ 1.620 Depreciation $ 438 $ 438 $ 438 Operating Cash Flow $ (1.205) $ 1.488 $ 1.989 $ 2.058
Fix Asset Investment

Cash Flow Projection '89-'91 - Invest New Product Line + Inventory Policy C (thousands dollars) 1989 1990 1991 Revenue $ 35.283 $ 46.283 $ 47.783 Total Expense** $ 32.847 $ 42.941 $ 44.316 EBITDA $ 2.436 $ 3.342 $ 3.467 Depreciation $ 438 $ 438 $ 438 EBIT $ 1.998 $ 2.904 $ 3.029 Taxes(40%) $ 799 $ 1.162 $ 1.211 NOPAT $ 1.199 $ 1.742 $ 1.817 Depreciation $ 438 $ 438 $ 438 Operating Cash Flow $ (1.205) $ 1.637 $ 2.180 $ 2.255
Fix Asset Investment

Interest Rate* NPV

15,5% 2.519

Interest Rate* NPV

15,5% 2.866

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

Cash Flow Projection '89-'91 - Invest New Product Line + Inventory Policy D (thousands dollars) 1989 1990 1991 Revenue $ 35.524 $ 46.524 $ 48.024 Total Expense** $ 32.939 $ 42.989 $ 44.358 EBITDA $ 2.585 $ 3.535 $ 3.666 Depreciation $ 438 $ 438 $ 438 EBIT $ 2.147 $ 3.097 $ 3.228 Taxes(40%) $ 859 $ 1.239 $ 1.291 NOPAT $ 1.288 $ 1.858 $ 1.937 Depreciation $ 438 $ 438 $ 438 Operating Cash Flow $ (1.205) $ 1.726 $ 2.296 $ 2.375
Fix Asset Investment

Cash Flow Projection '89-'91 - Invest New Product Line + Inventory Policy E (thousands dollars) 1989 1990 1991 Revenue $ 35.623 $ 46.623 $ 48.123 Total Expense** $ 32.976 $ 43.008 $ 44.375 EBITDA $ 2.647 $ 3.615 $ 3.748 Depreciation $ 438 $ 438 $ 438 EBIT $ 2.209 $ 3.177 $ 3.310 Taxes(40%) $ 884 $ 1.271 $ 1.324 NOPAT $ 1.325 $ 1.906 $ 1.986 Depreciation $ 438 $ 438 $ 438 Operating Cash Flow $ (1.205) $ 1.763 $ 2.344 $ 2.424
Fix Asset Investment

Interest Rate* NPV

15,5% 3.076

Interest Rate* NPV

15,5% 3.162

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

* using prime(11.5%) + 4% interest rate from factoring division ** COGS, R&D, Selling, general, administrative, interest, other expense from Pro Forma Income Statement

21

5. Capital Structure

22

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