Exide Corporation
Exide stock price had been lagging its industry averages, so its board of directors brought in a new CEO, John Lee. Lee had brought in Ashley Novak;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 understand and interpret financial statements and develop financial forecasts.
Novak began as she always did, by comparing Exide'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 Exide's latest financial statements plus some ratios and other data that Novak plans to use in her analysis.
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Exide (Millions of Dollars Except Per Share Data)
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Balance Sheet, 12/31/2013
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Income Statement, Year Ending 2013
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Cash
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$ 20
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Sales
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$2,000
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Accts. rec.
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280
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Op. costs (excl. depr.)
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1,800
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Inventories
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400
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Depreciation
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50
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Total CA
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$ 700
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EBIT
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$ 150
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Net fixed assets
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500
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Interest
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40
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Total assets
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$1,200
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Pretax earnings
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$ 110
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Taxes (40%)
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44
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Accts. pay. & accruals
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$ 80
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Net income
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$ 66
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Line of credit
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$0
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Total CL
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$ 80
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Dividends
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$20.0
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Long-term debt
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500
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Add. to RE
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$46.0
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Total liabilities
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$ 580
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Common shares
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10.0
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Common stock
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420
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EPS
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$6.60
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Retained earnings
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200
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DPS
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$2.00
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Total common equ.
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$620
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Ending stock price
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$52.80
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Total liab. & equity
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$1,200
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Selected Additional Data for 2013
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Exide
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Industry
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Exide
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Industry
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Op. costs/Sales
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90.0%
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88.0%
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Total liability/Total assets
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48.3%
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36.7%
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Depr./FA
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10.0%
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12.0%
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Times interest earned
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3.8
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8.9
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Cash/Sales
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1.0%
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1.0%
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Return on assets (ROA)
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5.5%
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10.2%
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Receivables/Sales
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14.0%
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11.0%
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Profit margin (M)
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3.30%
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4.99%
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Inventories/Sales
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20.0%
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15.0%
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Sales/Assets
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1.67
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2.04
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Fixed assets/Sales
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25.0%
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22.0%
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Assets/Equity
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1.94
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1.56
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Acc. pay. &accr. / Sales
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4.0%
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4.0%
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Return on equity (ROE)
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10.6%
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16.1%
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Tax rate
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40.0%
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40.0%
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P/E ratio
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8.0
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16.0
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ROIC
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8.0%
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12.5%
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NOPAT/Sales
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4.5%
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5.6%
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Total op. capital/Sales
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56.0%
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45.0%
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Note: Exide was operating at full capacity in 2013. Also, you may observe small differences in items like the ROE
when calculated indifferent ways. Any such differences are due to rounding, and they can be ignored.
a. Using Exide data and its industry averages, how well run would you say Exide 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. How much additional funds needed (AFN) for 2014 if the sale growth rate is 10%. Assume that the firm's 2013 ratios will remain the same in 2014.
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?
d. 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.
e. Define the term Internal and Sustainable growth rate. What is Exide's sustainable growth rate? Would the sustainable 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?
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%.
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Actual
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Forecast
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Inputs
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2013
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2014
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2015
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2016
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2017
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Sales growth rate:
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10%
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8%
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5%
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5%
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Op. costs/Sales:
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90%
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90%
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90%
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90%
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90%
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Depr./FA
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10%
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10%
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10%
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10%
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10%
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Cash/Sales:
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1%
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1%
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1%
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1%
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1%
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| Acct. rec. /Sales |
14%
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14%
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14%
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14%
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14%
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Inv./Sales:
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20%
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20%
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20%
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20%
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20%
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FA/Sales:
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25%
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25%
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25%
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25%
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25%
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AP &accr. / Sales:
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4%
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4%
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4%
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4%
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4%
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Tax rate:
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40%
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40%
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40%
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40%
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40%
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Rate on all debt
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8.0%
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8%
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8%
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8%
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Div. growth rate:
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5%
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10%
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10%
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10%
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10%
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Target WACC
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9%
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f. For each of the next four years, forecast the items in the above table.
g. Using the forecasted items in the section f, 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? Calculate the Economic Value Added (EVA) to see whether the company is creating value or destroying.
EVA = (ROIC - WACC) (Beg. Capital)
h. Assume that FCF will continue to grow at the growth rate for the last year in the forecast horizon (Hint: 5%). What is the terminal value at 2017? What is the present value of the terminal value? What is the present value of the forecasted FCF? (Hint: use the free cash flows for 2014 through 2017). What is the current value of operations? Using information from the 2013 financial statements, what is the current estimated intrinsic stock price?