Index

1. Assuming that the new product line is not introduced and that the company's inventory
policy remains unchanged, prepare pro forma financial statements for the years 1989,
1990 and 1991. Based on them, estimate the external financing requirement (bank loans
or long-term sources) for the same period...................................................................................1
2. In Kraft's place, what would you recommend regarding a) the amount of finished
goods inventory to maintain, b) the introduction of the new product line?...............................4
3. How would your recommendations in question 2 affect your funding needs for 1989,
1990 and 1991?...............................................................................................................................5
4. In Kraft's place, what financing plan would you recommend to cover the financing
required in questions 1, 2 and 3?..................................................................................................5

1. Assuming that the new product line is not introduced and that the company's
inventory policy remains unchanged, prepare pro forma financial statements
for the years 1989, 1990 and 1991. Based on them, estimate the external
financing requirement (bank loans or long-term sources) for the same period.
In this regard, Table N° 1 shows the projections made for the income statement and
Table N° 2 shows the projected balance sheet.

Table N° 1 - Projected Income Statements 1989 - 1991 (thousands of dollars)

1986 1987 1988 1989* 1990* 1991*

Ventas netas 2/ $9,040 $13,860 $26,593 $34,000 $40,000 $40,000
Coste de las ventas 3/ $5,920 $8,870 $16,221 $20,740 $24,400 $24,400
Margen Bruto $3,120 $4,990 $10,372 $13,260 $15,600 $15,600
Investigación y desarrollo 4/ $1,055 $1,455 $2,743 $3,507 $4,126 $4,126
Gastos G&A 5/ $1,955 $2,911 $5,940 $7,594 $8,935 $8,935
Ingresos de explotación $110 $624 $1,689 $2,159 $2,539 $2,539
Gastos de intereses 6/ $75 $100 $393 $393 $393 $393
Otros ingresos (gastos) 7/ -$12 -$5 -$20 -$69 -$124 -$124
Beneficio antes de impuestos $23 $519 $1,276 $1,697 $2,023 $2,023
Impuesto sobre sociedades 1/ $8 $208 $510 $679 $809 $809
Beneficio despues de impuestos $15 $311 $766 $1,018 $1,214 $1,214

Beneficio por acción 8/ $0.01 $0.19 $0.43 $0.57 $0.67 $0.67

1/ As of 1986, the effective corporate tax rate is 40%.

2/ Sales are expected to reach 34 million for 1989 and 40 million for 1990 and 1991.
3/ Cost of sales is expected to be 61% of sales during 1989-1991.
4/ and 5/ R&D and General and administrative expenses for the period 1989-1991 are determined on
the basis of the % of sales of the previous year.
6/ Interest expense remains constant for 1989-1991.
7/ The other income (expenses) are proportional to the sales and costs of the 1989 proforma in annex 3
of the Case.
8/ The number of shares in 1988 is assumed to be 1799 and remains constant.
Own elaboration.
Source: Dynatronics, Inc.
 Table N° 2 - Balance Sheet Projections 1989 - 1991 (thousands of dollars)

1986 1987 1988 1989* 1/ 1990* 1991*

Tesorería $305 $400 $500 $680 $800 $800

Cuentas por cobrar 5/ $1,733 $3,150 $5,638 $7,480 $8,800 $8,800
Existencias
Materias primas $320 $497 $930 $1,182 $1,391 $1,391
Trabajos en curso $468 $816 $1,343 $1,721 $2,025 $2,025
Productos terminados $610 $736 $1,018 $830 $976 $976
Gastos anticipados $20 $33 $60 $77 $91 $91
Total activo circulante $3,456 $5,632 $9,489 $11,970 $14,082 $14,082

Inmovilizado material bruto $530 $745 $1,343 $955 $567 $179

Menos: depreciación acumulada 2/ $180 $300 $388 $388 $388 $388
Inmovilizado material neto $350 $445 $955 $567 $179 $0
Total activo $3,806 $6,077 $10,444 $12,537 $14,261 $14,082

Efectos a pagar $960 $2,161 $4,537 $4,537 $4,537 $4,537

Cuentas por pagar $398 $621 $1,210 $1,210 $1,210 $1,210
Gastos devengados $322 $443 $811 $811 $811 $811
Provisión para impuestos $23 $200 $303 $303 $303 $303

Otros $50 $255 $400 $400 $400 $400

Total pasivo exigible a corto plazo 3/ $1,753 $3,680 $7,261 $7,261 $7,261 $7,261

Financiamiento adicional externo $2,092 $3,816 $3,637

Acciones ordinarias (0.5 dólares de valor a la par) $795 $820 $900 $900 $900 $900
Pago excedente $1,215 $1,223 $1,164 $1,164 $1,164 $1,164
Beneficios retenidos $43 $354 $1,120 $1,120 $1,120 $1,120
Total capital 4/ $2,053 $2,397 $3,184 $3,184 $3,184 $3,184

Total pasivo y neto $3,806 $6,077 $10,445 $10,445 $10,445 $10,445

1/ Kraft prepared the current assets forecast for 1989.

2/ Since there is no new production line, the fixed assets of 1989 1988 are the same. Depreciation of
388 is assumed for 1989 and 1990, as well as 179 for 1991.
3/ and 4/ Short-term liabilities and equity are held constant.4/ and 5/ R&D and General and
administrative expenses for the period 1989-1991 are determined on the basis of the % of sales of the
previous year.
5/ Accounts receivable has been calculated assuming a collection term of 80.3
6/ A turnover of finished products of 15 days was considered.
Own elaboration.
Source: Dynatronics, Inc.
 In relation to the estimates in Table No. 2, additional external financing is estimated
at US$2,092, US$3,816 and US$3,637 for 1989, 1990 and 1991, respectively.
2. In Kraft's place, what would you recommend regarding a) the amount of
finished goods inventory to maintain, b) the introduction of the new product
line?

In this regard, the following should be evaluated:

2.1. The first alternative "maintain inventory quantity" should consider the
financial data in Annex 3 on possible proformas for inventory policy".

According to the above, it can be seen in Table 1 that proforma E would

be the best option when the first alternative of "maintaining the amount of
inventories" is chosen, since it provides an NPV of USD 4,011 thousand.
Also, a higher return to shareholders - 0.91 (1989), 1.06 (1990) and 1.06
(1991).

2.2. The second alternative, "introduce a new product line", takes into
consideration the increase in sales by 5 and 6.5 million for 1990 and 1991,
respectively. Also, an investment in equipment of US$250 thousand and
an increase in constant overhead of US$90 thousand.

Taking into consideration the above and the improvements in the inventory
control system, it can be seen in Table 1 that the best option is proforma
E, which represents an NPV of USD 4,319 thousand. In addition, a higher
return to shareholders - 0.88 (1989), 1.16 (1990) and 1.21 (1991).

In conclusion, it can be stated that the best option is the second alternative on the
introduction of a new line using proforma E, since it generates higher net present
value and greater shareholder value.

Table 1 - NPV of potential alternatives per proforma

Beneficio por acción

Escenario 1989* 1990* 1991* Van
Alternativa A Proforma 1989 $0.57 $0.67 $0.67 S/. 2,509
Alternativa A Proforma A $0.65 $0.77 $0.77 S/. 2,887
Alternativa A Proforma B $0.76 $0.89 $0.89 S/. 3,358
Alternativa A Proforma C $0.84 $0.98 $0.98 S/. 3,714
Alternativa A Proforma D $0.89 $1.03 $1.03 S/. 3,924
Alternativa A Proforma E $0.91 $1.06 $1.06 S/. 4,011
Alternativa B Proforma 1989 $0.54 $0.74 $0.77 S/. 2,687
Alternativa B Proforma A $0.62 $0.85 $0.88 S/. 3,099
Alternativa B Proforma B $0.73 $0.98 $1.02 S/. 3,610
Alternativa B Proforma C $0.81 $1.08 $1.12 S/. 3,997
Alternativa B Proforma D $0.86 $1.14 $1.18 S/. 4,224
Alternativa B Proforma E $0.88 $1.16 $1.21 S/. 4,319
 Own elaboration.
Source: Dynatronics, Inc.
3. How would your recommendations in question 2 affect your funding needs for
1989, 1990 and 1991?

In the previous question, it was advised to opt for alternative 2 regarding the
implementation of a new product line, since this significantly increases revenues
(see point 2.2) and together with the adjustments to the inventory control system
generates greater added value.

However, this recommendation results in higher financing needs, as shown in Table

2.

Table 2 - Funding requirements for the years 1989-1991 for Alternative B

Proforma E
Financiamiento Beneficio
Alternativa Año VAN
adicional externo por acción
1989* $4,717 0.88
Alternativa B Profoma E 1990* $8,724 1.16 S/. 4,319
1991* $9,001 1.21

Own elaboration.
Source: Dynatronics, Inc.

With respect to the increased financing requirements, these are associated with
higher pro forma E costs, increased sales and accounts receivable, additional
investment of $250 thousand and increased overhead by $90 thousand.

4. In Kraft's place, what financing plan would you recommend to cover the
financing required in questions 1, 2 and 3?

Firstly, it should be noted that the case mentions that there is a credit limit for bank
financing, stating that the ratio "total liabilities over shareholders' equity" cannot
exceed 2. In relation to this, and as shown in Table 3, this ratio is above 2. In
addition, such financing has a rate of 11.5% plus 1.5%, or 13%.
 Table 3 - Ratio of liabilities over shareholders' equity

1986 1987 1988 1989* 1990* 1991*

Total pasivo exigible a corto plazo $1,753 $3,680 $7,261 $7,261 $7,261 $7,261
Total capital $2,053 $2,397 $3,184 $3,184 $3,184 $3,184
Ratio 0.85 1.54 2.28 2.28 2.28 2.28

Additionally, there is the alternative of the factoring division, however this has a rate
of 11.5% plus 4%, i.e. 15.5% and has a limit of 90% of the outstanding balances of
the account receivable, i.e. 6,732 (7840*0.9) thousand dollars.

On the other hand, there is another alternative to obtain financing through a "public
offering of common stock". In this way, up to 400 thousand would be placed with a
value after commissions and expenses of 5 dollars, which amounts to 2,000
thousand of financing.

By adding both amounts together, a maximum financing of US$8,732 thousand

could be obtained. However, it should be noted that the financing needs amount to
4,717 (year 1989), 8,724 (year 1990) and 9,001 (year 1991).

In conclusion, financing needs could not be met by 1991.