Assessment of dynatronics financial performance

Reference no: EM1355776

1. What is your assessment of Dynatronics' financial performance over the period 1986-1988? What strengths or weaknesses, if any, do you see?

2. What sustainable growth problems, if any, has Dynatronics experienced over the past several years? How does the company appear to have addressed these problems? Should management be concerned about any potential growth problems in coming years?

a). Assuming Dynatronics does not invest in the new product line, estimate the company's need for external financing over next three years. Make whatever assumptions you feel are appropriate. Please state your assumptions and explain the more important or controversial ones.

b). Absent the new product line, does it appear that Dynatronics will be able to get by relying on its existing bank loan secured by accounts receivable, or will they need to raise additional money from some other source?

4. On page 3 of the case Ms. Kraft uses a target capital structure of 60% debt and 40% equity to estimate Dynatronics's WACC.

a). Considering the company's 1988 balance sheet and any other relevant information, do you think this capital structure is appropriate for estimating the company's WACC, if not, what capital structure would you recommend?

b). Using your recommended capital structure and Ms. Kraft's after-tax costs of debt and equity, estimate a revised WACC for Dynatronics.

c). Dynatronics adds 4.3 percentage points to its estimated WACC "in recognition of the tendency for the forecasts to be optimistic." Do you agree with this practice? Why or why not?

5. The following questions relate to the proposed new product line.

a). Prepare a table indicating the cash flows that are relevant for evaluating the new product line.

b). Some company executives argue that R&D expenses should be included as a relevant cash flow for evaluating the new product line. They reason that continued R&D spending is critical to the long-run success of the company and to maintain this spending, all new products should pay for their fair share of the cost of developing future new products. If today's products cannot support future R&D, they argue, the company will wither and die. Do you agree? Why, or why not?

c). Does the line appear financially attractive? Why, or why not?

6. Without preparing an entirely new pro forma forecast, prepare a rough estimate of the effect the new product line will have on the company's need for external financing over the coming three years. Does it appear the company can safely finance the new product line using its existing accounts receivable financing line?

7. What advice would you give Ms. Kraft about the financial challenges and opportunities presently facing Dynatronics?

Reference no: EM1355776

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