Dynatronics

PART 1: WHAT ARE THE OPPORTUNITES? Are they worth doing? PART 2: Assuming yes, what are the central issues? 1. Need For Funds: Constraints: Total Liabilities to Net Worth
Loans to Accounts Receivables <85% to get lower rate

1.

How Much Money Is Needed? Without new investments? With new investments?

3. What Sources?
Financing and Growth - 1

External Financing Needs

External Financing Needs: Produce proforma balance sheets / income statements for 1989-1991.
CHOICES:

1. Bank Loan: Prime + 1/5% = 13% 2. Factoring division (all loans): 15.5% 3. Equity: 400,000 shares + regular bank loan

Financing and Growth - 2

New Product Line

Valuation of New Product Introduction

Don't forget Net Working Capital Needs! Assume: 26% NWC per incremental $ sales CGS/Sales = 61 % SG&A/Sales = 22.3 %

Financing and Growth - 3

Cash Flows of New Project

1989 1990 1991 1992 1993 1994 1995

Sales CGS (61% Sales) SG&A (22.4% sales) R&D - 0 allocation Introductory Expense Depreciation Cash Flows Before Tax TAXES After TAX Cash Flows Depreciation add back Invest. Equip Invest. NWC (26.1%) CASH FLOWS PV @ 17.8%

0 $

5,000 $ 6,500 $ 3,050 3,965 1,120 1,456 0 0 90 0 50 50 690 $ 1,029 $ 276 412 617 $ 50

6,500 $ 3,965 1,456 0 0 50 1,029 $ 412 617 $ 50

4,300 $ 2,150 2,623 1,312 963 482 0 0 0 0 50 50 664 $ 307 266 123

414 $ 50

398 $ 184 50 50

$ (250) $ $ (250) $ $ (250) (1,305) $ (841) $ -713.92 (392) $ 276 $ 198.82 $ 574 $ 561 $ 1,022 $ 795 $ 530.97 350.59 561 561 209.99

667 $ 408.27

NPV

735

Financing and Growth - 4

"Income Statement" Inventory Investment Level B

1989 1990 1991

Sales Profits Increases in cash Increases in AR Increases in Inventory Increases in Prepaid Inc. Net Fixed Assets Total Increase Assets

896 $ 197 18 197 533 2 0 750

896 197 18 197 533 2 0 750

Increases in: Notes AP Prov. Taxes Net Worth Total Increase L+NW

340 82 131 197 750

274 82 0 394 750

Financing and Growth - 5

WACC Step 1: Calculate Asset Beta

WACC calculations
AMP Analog Dynatech

Industry leveraged Betas 1.35 1.4

1.3

tax rate M/Book

0.40 2.95

0.40 1.78

0.40 1.31

Bunleveraged Debt 0.05 Book Equity 0.95 Market equity 2.80 D/E D/E*(1-t) Beta UNL 0.02 0.01 1.39

0.05 0.95 1.69 0.03 0.01 1.33

0.18 0.82 1.07 0.17 0.07 1.22

AVERAGE

1.31

RELEVERAGE: DYNATRONICS

Financing and Growth - 6

D/E based on Market Value Equity

RELEVERAGE: DYNATRONICS DEBT Equity D/E D/E*(1-t) BETA MRP Rf Re $ 4,537 $ 14,300 Actual Market leverage "Proposed" D/E 0.32 0.25 0.19 1.56 0.06 0.0915 18.54%
Financing and Growth - 7

0.15 1.51 0.06 0.0915 18.22%

WACC
D/E D/V rd re 38.78% 27.9% 13% 18.87% 25.00% 20% 13% 18.22%

WACC

15.78%

16.13%

Financing and Growth - 8

Class calculations (group of Mohamed Ghorbel)

Financing and Growth - 9

How to decide how to finance ongoing business? What factors to consider? What ratios to examine?

Financing and Growth - 10