Donald Sheckle 416000322 MGMT3048

1) The median ratio was used for the industry ratios because the median is the value that a number is
equally likely to fall above or below it.

Daktronics solvency ratios (2007 – 2009) Industry solvency ratios (2007 – 2009)
2007 Current ratio = 147,986 / 103,082 = 1.4 2007 Current ratio = 1.9
2008 Current ratio = 165,697 / 103,152 = 1.6 2008 Current ratio = 2.0
2009 Current Ratio = 206,973 / 102,430 = 2.0 2009 Current Ratio = 2.1
2007 Quick ratio = 147,986 – 45,835 – 5,044/ 2007 Quick ratio = 1.2
103,082 = 0.9 2008 Quick ratio = 1.2
2008 Quick ratio = 165,697 – 50,525 – 4,796 / 2009 Quick Ratio = 1.4
103,152 = 1.1
2009 Quick Ratio = 206,973 – 51,400 – 5,587 /
102,430 = 1.5

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or
those due within one year. Based on the information above the Daktronics company over the 3 years has
improved on its ability to repay on its short term debt. The ratio moved from 1.4 mean that for every
dollar of current liability the company had, they had a dollar and fourth cents to repay in current assets.
Although this would seem like a good ratio at the time in comparison to the industry standards this was
below the median. The average company in the industry basically had a current ratio of 1.9 which mean
Daktronics had work to do in order to achieve a better ratio. The following year they wear able to
increase the ratio to 1.6 but they were still behind the industry standards. In the year 2009 Daktronics
was finally able to increase its current ratio to 2.0 which was almost par with the industry standard of
2.1. The quick ratio is an indicator of a company’s short-term liquidity position and measures a
company’s ability to meet its short-term obligations with its most liquid assets. Following a similar
pattern to the current ratio, in the first two years the company is behind the industry in solvency.
However by 2009 the company was able to improve on its solvency and reach up to par with the
industry. In 2007 the company was breaking even to pay it current liabilities with its quick assets. There
was a slight increase in 2008 and finally in 2009 there was a drastic improvement in the ratio.

Daktronics efficiency ratios (2007 – 2009) Industry efficiency ratios (2007 – 2009)
2007 Inventory Turnover ratio = 433,201 / 45,835 2007 Inventory Turnover ratio = 14.8
= 9.5 2008 Inventory Turnover ratio = 18.2
2008 Inventory Turnover ratio = 499,677 / 50,525 2009 Inventory Turnover ratio = 14.1
= 9.9
2009 Inventory Turnover ratio = 581,931 / 51,400
= 11.3

The inventory turnover ratio is an efficiency ratio that shows how effectively inventory is managed by
comparing cost of goods sold with average inventory for a period. This measures how many times
average inventory is sold during a period. Based on the ratios calculated the Daktronics company has an
inventory turnover ratio of 9.5, 9.9 and 11.3 in years 2007, 2008 and 2009 respectively. Inventory
turnover is a measure of how efficiently a company can control its merchandise, so it is important to
have a high turn. In comparison to industry standards the Daktronics Company is not operating as
efficiently as the rest of the industry. Especially in the year 2008 the industry was turning over inventory
almost two times more than Daktronics. However this may be very misleading based on the fact that
Daktronics sells products ranging from prices as low as 1000 dollars all the way up to 40 million dollars.
Donald Sheckle 416000322 MGMT3048
Logically the cheaper products will turn over faster and will be in more demand therefore allowing the
companies than deal with cheaper products to have a better turnover ratio

Daktronics profitability ratios (2007 – 2009) Industry profitability ratios (2007 – 2009)
2007 Return on sales = 24,427 / 433,201 = 0.056 2007 Return on sales = 3.4%
or 5.6% 2008 Return on sales = 3.1%
2008 Return on sales = 26,213 / 499,677 = 0.052 2009 Return on sales = 1.8%
or 5.2% 2007 Return on assets = 7.1%
2009 Return on sales = 26,428 / 581,931 = 0.045 2008 Return on assets = 7.1%
or 4.5% 2009 Return on assets = 3.5%
2007 Return on assets = 24,427 / 265,850 = 0.092
or 9.2%
2008 Return on assets = 26,213 / 294,479 = 0.089
or 8.9%
2009 Return on assets = 26,428 / 324,876 = 0.081
or 8.1%

Return on sales (ROS) is a ratio used to evaluate a company's operational efficiency. This measure
provides insight into how much profit is being produced per dollar of sales. Based on the results of this
ratio for every dollar of sale Daktronics is being more profitable compared to the rest of the industry.
Which shows even though their inventory turnover may not be as high as the other companies they are
still operating in an efficient manner to generate good returns on sales. Return on assets ratio is a
profitability ratio that measures the net income produced by total assets during a period. Although the
company’s return on assets is falling each year the company is still achieving a better return on assets as
opposed to industry standards. The ratio shows that the company is effectively converting its assets into
net profits.

Daktronics Company common size income statement 2008 and 2009

May April
2,2009 26,2008 Change

Sales 100.00% 100.00% 0.00%

Cost of sales 73.30% 70.46% 2.84%

Gross Profit 26.70% 29.54% -2.84%

SG&A expenses 15.17% 17.66% -2.48%

Other operating (income)/expense 0.50% -0.21% 0.71%

EBITDA 11.03% 12.09% -1.06%

Depreciation 4.15% 4.16% -0.01%

Amortization 0.05% 0.06% -0.01%

EBIT 6.83% 7.86% -1.04%

Interest expense 0.04% 0.28% -0.24%

Interest (income) -0.36% -0.35% 0.01%

Pretax Income 7.14% 7.93% -0.79%

Donald Sheckle 416000322 MGMT3048
Income Taxes 2.60% 2.68% -0.09%
Net Income 4.54% 5.25% -0.70%
Analysis: The cost of goods sold in 2008 was 70.46% of net sales but it increased the following year by
2.84%. This change could have arrived from various outside factors such as an increase in the price of
raw materials, transportation cost of the raw materials etc. Therefore the gross profit of the company
would decrease by 2.84% because of the increase in cost of goods sold. SG&A expense decreased by
2.48% while other operating income/expenses made an increase by 0.71% which in turn caused the
EBITDA to decrease by 1.06%. Depreciation and aromatization didn’t chance much they both had small
variations of 0.01%. The EBIT ended up falling by 1.04% which was expected since there was a decrease
in the gross profit. Interest expense decreased by 0.24% this could have come about the company paid
off some of it debt leaving them with less interest expense to repay. Interest income however stayed
almost the same which means they are basically gathering the same amount of interest income from
investments. These factors caused the pretax income to fall by 0.79%. Since the company was not as
profitable as the previous year this meant that the income tax figure would fall. There was a 0.09%
decrease in income tax and the overall net income fell by 0.7%.

Daktronics Company common size Balance Sheet 2008 and 2009

May 2,2009 April 26,2008 Change
Cash 11.24% 3.17% 8.07%
Accounts Receivable, net 18.90% 19.19% -0.29%
Inventories 15.82% 17.16% -1.34%
Prepaid Expenses 1.72% 1.63% 0.09%
Deferred Taxes 4.62% 3.23% 1.39%
Other Current Assets 11.41% 11.89% -0.49%
Total Current Assets 63.71% 56.27% 7.44%
PP&E 27.53% 33.12% -5.59%
Long term receivables 4.89% 5.72% -0.83%
Goodwill 1.40% 1.60% -0.20%
Investments in affliates 2.48% 3.29% -0.82%
Total Assets 100.00% 100.00% 0.00%
Accounts Payable 9.32% 10.71% -1.39%
Accrued expenses 10.94% 8.86% 2.08%
Other current liabilities 11.27% 15.46% -4.19%
Total current liabilities 31.53% 35.03% -3.50%
Revolver 0.00% 0.00% 0.00%
Long-term debt 0.01% 0.02% -0.01%
Long-term marketing 3.24% 2.72% 0.51%
Total liabilities 34.77% 37.77% -3.00%
Common stock, no par 8.58% 8.71% -0.13%
Paid-in capital 4.28% 3.53% 0.75%
Retained Earnings 52.54% 50.23% 2.32%
Treasury stock, at cost 0.00% 0.00% 0.00%
Accumulated other loss -0.17% -0.23% 0.06%
Total equity 65.23% 62.23% 3.00%
Total liabilities and Equity 100.00% 100.00% 0.00%
Donald Sheckle 416000322 MGMT3048

Analysis: The Daktronics Company’s total current assets increased by 7.44% from 2008 to 2009. This was
heavily due to the increase in cash by 8.07%. This was most likely caused by the sale of fixed assets to
generate more cash for the company, property plant and equipment decreased by 5.59% between 2008
and 2009. There wasn’t much changes in the other current assets, account receivable and inventory
changed by -0.29% and -1.34% respectively while prepaid expenses, deferred tax and other current
assets changed by 0.09%, 1.39% and -0.49% respectively. In terms of the fix assets section of the balance
sheet as mentioned prior property plant and equipment was reduced by 5.59% implying that there were
sales of fixed assets during the period. The other items in this section didn’t have any significant changes
with long term receivables, goodwill and investment affiliates all decreasing by -0.83%, -0.20% and
-0.82% respectively. The total liabilities decreased by 3% and any overall decrease in liabilities is good for
a company since it will free up funds to be utilized elsewhere in the company. This overall 3% decrease
stemmed from the reduction in accounts payable and other current liabilities by -1.39% and 4.19%
respectively. The long term expenses didn’t make much of an impact on the 3.0% decrease in liabilities.
Lastly in the equity section the total equity went up by 3.0% and this was heavily due to the fact that
retained earnings increased by 2.32%. This would normally be as a result of an increased net profit but
the company’s net profit fell by -0.70% which implies that the retained earnings increased because the
company paid out less in dividends. The other Equity items didn’t variate much.

Equity cash flow for the period 2007 – 2009:

Equity Cash
Flow (in
thousands)
May 2,2009 April April
26,2008 28,2007
EBIT 39,729.00 39,292.00 35,696.00
Add Depreciation 24,133.00 20,806.00 13,298.00
Less Capex 16,037.00 32,203.00 58,865.00
Less NWC 41,988.00 17,641.00 -30,026.00
Operating 5,837.00 10,254.00 20,155.00
Cashflow
Less Taxes 15,125.00 13,413.00 12,355.00
Less interest 244.00 1,423.00 725.00
Less Debt Payment 546 563.00 102
Add Debt Issue 0 -24,615.00 24,615.00
Equity Cash Flow -10,078.00 -29,760.00 31,588.00

Analysis: Equity cash flows measure the cash flow available to stockholders after payments to debt
holders are deducted from operating cash flows. From the results of the equity cash flow for the period
2007 to 2009, only in 2007 there is a positive equity cash flow. One of the main reasons behind the
positive equity cash flow in 2007 is because of the added debt issue. In the following year the company
paid off this debt and the equity cash flow moved into the negatives. From 2007 to 2009 there has been
a steady decrease in the operating cash flow moving from $20,155 down to $5,837. The funds the
company had to pay in taxes also increased each year as the business was being more profitable each
year but this was eating into the company’s operating cash flow. From these results the company cannot
afford to be paying out cash dividends in years 2008 and 2009. It would be more feasible to utilize
another form of dividend payout such as stock dividends.
Donald Sheckle 416000322 MGMT3048
My analysis is consistent with the figure one stock price performances for the period I have evaluated.
My analysis follows the trends and patterns of the stock prices in figure 1.

2) N.B The pro-forma financial statements were done in the common size format because it would be
easier to explain in this set up. The statements have been converted into figure below to do the new
financial ratios in number 3.

Daktronics percentage of sale pro-forma Income Statement 2010-2013

April 30 April 30 April 30 April 30
2010 2011 2012 2013
Sales 100.00% 100.00% 100.00% 100.00%
Cost of sales 75.00% 75.80% 76.00% 77.00%
Gross Profit 25.00% 24.20% 24.00% 23.00%
SG&A expenses 15.00% 14.89% 14.35% 14.00%
Other operating (income)/expense -0.75% -0.35% 0.45% -0.62%
EBITDA 10.75% 9.66% 9.20% 9.62%
Depreciation 4.14% 4.13% 5.02% 5.01%
Amortization 0.04% 0.03% 0.10% 0.08%
EBIT 6.57% 5.50% 4.08% 4.53%
Interest expense 0.09% 0.11% 0.10% 0.08%
Interest (income) -0.40% -0.42% -0.41% -0.40%
Pretax Income 6.88% 5.81% 4.39% 4.85%
Income Taxes 2.65% 1.98% 1.55% 1.62%
Net Income 4.23% 3.83% 2.84% 3.23%

Justification: The percentages which went into the percentage of sales pro-forma income statement
came about through careful analysist of previous financial statements, historical financial ratio and
possible future trends needs and wants of the company. The cost of sales increased steadily because
naturally the factor of inflation will always lead to higher cost and over the previous years they have
always been an increase in cost of sales. Naturally the increase in cost of sales decreased the gross profit
in each year. In terms of the SG&A expenses they made a slow but steady decline because the case says
the company was looking to cut back on employees but because of the recession in 2009 they stalled the
process. The employee section of the case then said, “Steve Dyer, an analyst with Craig-Hallum Capital
Group wrote, “They have sacrificed profit for their employees and the community.”” The depreciation
expense and amortization expenses stayed steady for 2010 and 2011 but made increases in the
subsequent years. This is because as time passes the company will need to sell and purchase new
equipment and fix assets to either expand and to keep up with competitors and changing technologies.
These new assets will of course be depreciated which is why the expense is expected to increase.
Interest income and expenses are expected to maintain some stability assuming that these interest
incomes and expenses are due to long term investments therefore the rate would not vary much. Finally
the income tax percentage will correspond with the pretax income. Lastly net income is expected to fall
in the next three years because of external factors such as inflation, recession and competition then in
the fourth year there will be a bit of recovery when funds in the economy have opened again.

Daktronics percentage of sale pro-forma Balance Sheet 2010-2013

April 30 April 30 April 30 April 30

2010 2011 2012 2013
Donald Sheckle 416000322 MGMT3048
Cash 12.30% 12.96% 13.10% 13.50%
Accounts Receivable, net 19.00% 20.10% 20.62% 21.02%
Inventories 16.00% 16.23% 16.44% 17.00%
Prepaid Expenses 1.78% 1.79% 1.82% 1.83%
Deferred Taxes 4.69% 4.71% 4.80% 4.91%
Other Current Assets 11.50% 11.63% 11.70% 12.00%
Total Current Assets 65.27% 67.42% 68.48% 70.26%
PP&E 26.42% 25.00% 26.44% 26.77%
Long term receivables 4.40% 3.56% 1.54% 0.47%
Goodwill 1.35% 1.44% 1.22% 1.30%
Investments in affiliates 2.56% 2.58% 2.32% 1.20%
Total Assets 100.00% 100.00% 100.00% 100.00%
Accounts Payable 9.86% 9.90% 10.44% 10.78%
Accrued expenses 11.55% 11.48% 11.77% 12.00%
Other current liabilities 11.66% 11.32% 11.67% 10.00%
Total current liabilities 33.07% 32.70% 33.88% 32.78%
Revolver 0.00% 0.00% 0.00% 0.00%
Long-term debt 0.01% 0.02% 0.01% 0.01%
Long-term marketing 3.29% 3.55% 3.76% 4.00%
Total liabilities 36.37% 36.27% 37.65% 36.79%
Common stock, no par 8.66% 8.71% 8.93% 9.10%
Paid-in capital 4.00% 3.53% 3.07% 3.23%
Retained Earnings 51.32% 51.72% 50.59% 51.06%
Treasury stock, at cost 0.00% 0.00% 0.00% 0.00%
Accumulated other loss -0.35% -0.23% -0.24% -0.18%
Total equity 63.63% 63.73% 62.35% 63.21%
Total liabilities and 100.00% 100.00% 100.00% 100.00%
Equity

Justification: The percentages which went into the percentage of sales pro-forma balance sheet came
about through careful analysist of previous financial statements, historical financial ratio and possible
future trends needs and wants of the company. In each of the previous years the cash figures made
increases and it is expected to follow this same pattern which is why there is a steady increase in the
cash figure. This is the case with the other current assets as well over the previous years they made
steady increases and they are expected to follow a similar trajectory in the following four years. Fixed
assets on the other hand aren’t as straight forward especially with the purchase and sale of new
equipment and technology. Property plant and equipment is expected to decrease in years 2010 and
2011 because they will need to sell some equipment as they have reached scrap value. Also the fact that
the company delayed laying off staff the extra funds may not be available to get all the equipment they
desire. In 2012 and 2013 the property plant and equipment is expected to increase again since the
recession will be over at that point and more funds are available to upgrade and purchase new
equipment. Long term receivables are expected to decrease each year as payments are collected. While
investments in affiliates and goodwill are both expected not to variate much. In terms of current
liabilities accounts payable is expected to follow the trend of a steady increase. Only one of the last four
years prior this wasn’t the case. Accrued expense and other liabilities aren’t expected to fluctuate largely
and for the next 4 year they aren’t expected to go above or below the 10-12 percent range. The long
Donald Sheckle 416000322 MGMT3048
term liabilities are miniscule which leaves the prediction of total liabilities for the next four years
between 36-38 percent. This means equity ranges from 62-64 percent. Common stock is expected to
follow the trend of the previous years and increase yearly. Paid in capital on the other hand is expected
to fall because of the recession. Since the business isn’t as profitable as it used to be, the value of its
stock should lose value and reduce the amount of money the company will gain from selling equity.
Retained earnings is also expected to fall corresponding with the fall in profits which is expected over the
next four years. Lastly treasury stock is expected to be held constant and accumulated other loss isn’t
expected to variate much.

The pro-forma financial statements converted to figures:

Daktronics percentage of sale pro-forma Income Statement 2010-2013 (in thousands)

April 30 April 30 April 30 April 30
2010 2011 2012 2013
Sales (5% increase each year) $611,027.5 $641,578.9 $673,657.8 $707,340.7
5 3 7 7
Cost of sales $458,270.6 $486,316.8 $511,979.9 $544,652.3
6 3 8 9
Gross Profit $152,756.8 $155,262.1 $161,677.8 $162,688.3
9 0 9 8
SG&A expenses $91,654.13 $95,531.10 $96,669.90 $99,027.71
Other operating (income)/expense -$4,582.71 -$2,245.53 $3,031.46 -$4,385.51
EBITDA $65,685.46 $61,976.52 $61,976.52 $68,046.18
Depreciation $25,296.54 $26,497.21 $33,817.63 $35,437.77
Amortization $244.41 $192.47 $673.66 $565.87
EBIT $40,144.51 $35,286.84 $27,485.24 $32,042.54
Interest expense $549.92 $705.74 $673.66 $565.87
Interest (income) -$2,444.11 -$2,694.63 -$2,762.00 -$2,829.36
Pretax Income $42,038.70 $37,275.74 $29,573.58 $34,306.03
Income Taxes $16,192.23 $12,703.26 $10,441.70 $11,458.92
Net Income $25,846.47 $24,572.47 $19,131.88 $22,847.11

Daktronics percentage of sale pro-forma Balance Sheet 2010-2013 (in thousands)

April 30 April 30 April 30 April 30

2010 2011 2012 2013
Cash $41,957.74 $46,419.58 $49,267.08 $53,309.99
Accounts Receivable, net $64,812.76 $71,993.33 $77,548.64 $83,005.63
Inventories $54,579.17 $58,131.93 $61,828.30 $67,131.10
Prepaid Expenses $6,071.93 $6,411.35 $6,844.74 $7,226.47
Deferred Taxes $15,998.52 $16,870.08 $18,052.06 $19,389.04
Other Current Assets $39,228.78 $41,655.84 $44,001.90 $47,386.66
Total Current Assets $222,648.8 $241,482.1 $257,542.7 $277,448.8
9 2 2 8
PP&E $90,123.85 $89,543.95 $99,436.76 $105,711.7
3
Long term receivables $15,009.27 $12,751.06 $5,791.70 $1,855.98
Donald Sheckle 416000322 MGMT3048
Goodwill $4,605.12 $5,157.73 $4,588.23 $5,133.55
Investments in affiliates $8,732.67 $9,240.94 $8,725.16 $4,738.67
Total Assets (5% $341,119.8 $358,175.7 $376,084.5 $394,888.8
increase each year) 0 9 8 1
Accounts Payable $33,634.41 $35,459.40 $39,263.23 $42,569.01
Accrued expenses $39,399.34 $41,118.58 $44,265.16 $47,386.66
Other current liabilities $39,774.57 $40,545.50 $43,889.07 $39,488.88
Total current liabilities $112,808.3 $117,123.4 $127,417.4 $129,444.5
2 8 6 5
Revolver $0.00 $0.00 $0.00 $0.00
Long-term debt $34.11 $71.64 $37.61 $39.49
Long-term marketing $11,222.84 $12,715.24 $14,140.78 $15,795.55
Total liabilities $124,065.2 $129,910.3 $141,595.8 $145,279.5
7 6 4 9
Common stock, no par $29,540.97 $31,197.11 $33,584.35 $35,934.88
Paid-in capital $13,644.79 $12,643.61 $11,545.80 $12,754.91
Retained Earnings $175,062.6 $185,248.5 $190,261.1 $201,630.2
8 2 9 3
Treasury stock, at cost $0.00 $0.00 $0.00 $0.00
Accumulated other loss -$1,193.92 -$823.80 -$902.60 -$710.80
Total equity $217,054.5 $228,265.4 $234,488.7 $249,609.2
3 3 4 2
Total liabilities and $341,119.8 $358,175.7 $376,084.5 $394,888.8
Equity (5% increase each 0 9 8 1
year)

3) All ratios rounded to one decimal place

Daktronics solvency ratios (2007 – 2009)
2007 Current ratio = 147,986 / 103,082 = 1.4
2008 Current ratio = 165,697 / 103,152 = 1.6
2009 Current Ratio = 206,973 / 102,430 = 2.0
2007 Quick ratio = 147,986 – 45,835 – 5,044/
103,082 = 0.9
2008 Quick ratio = 165,697 – 50,525 – 4,796 /
103,152 = 1.1
2009 Quick Ratio = 206,973 – 51,400 – 5,587 /
102,430 = 1.5
Planning period solvency ratios (2010 – 2013)
2010 Current ratio = 222,648.89/112,808.32 = 2.0
2011 Current ratio = 241,482.12 / 117,123.48=
2.1
2012 Current Ratio = 257,542.72/127,417.46 =
2.0
2013 Current Ratio = 277,448.88/129,444.55 =
2.1
2010 Quick ratio = 222,648.89 -54,579.17-
6,071.93/112,808.32 = 1.4
2011 Quick ratio = 241,482.12 -58,131.93 -
6,411.35 / 117,123.48= 1.5
2012 Quick Ratio = 257,542.72 -61,828.30 -
6,844.74 /127,417.46 = 1.5
2013 Quick Ratio = 277,448.88 - 67,131.10
-7,226.47/129,444.55 = 1.6
Donald Sheckle 416000322 MGMT3048
Analysis: From the results of the pro-forma balance sheet the company is expected to maintain a solid
current ratio for the next four years. Showing improvements compared to the results of the historical
current ratios. This is a good sign for the company especially since there was a recent recession and falls
in there net profits they are still able to cover their debt easily. In addition even though there was a slight
decrease in the quick ratio from 2009 to 2010 the company was still able to improve on this ratio going
forward into the following years. Daktronics is not having any solvency problems and this is because of
the fact that the company attempts to finance most of its assets via equity financing.

Daktronics efficiency ratios (2007 – 2009)
2007 Inventory Turnover ratio = 433,201 / 45,835
= 9.5
2008 Inventory Turnover ratio = 499,677 / 50,525
= 9.9
2009 Inventory Turnover ratio = 581,931 / 51,400
= 11.3
Planning period efficiency ratios (2010 – 2013)
2010 Inventory Turnover ratio = 611,027.55 /
54.579.16 = 11.2
2011 Inventory Turnover ratio = 641,578.93 /
58,131.93 = 11.0
2012 Inventory Turnover ratio = 673,657.88 /
61,828.04 = 10.9
2013 Inventory Turnover ratio = 707,340.78 /
67,130.82 = 10.5

Analysis: From the results of the pro-forma financial statements from 2010 to 2013 the inventory ratio
has fell each year. This shows that the company isn’t managing its inventory properly especially with the
changes in economic conditions.

Daktronics profitability ratios (2007 – 2009)
2007 Return on sales = 24,427 / 433,201 = 0.056
or 5.6%
2008 Return on sales = 26,213 / 499,677 = 0.052
or 5.2%
2009 Return on sales = 26,428 / 581,931 = 0.045
or 4.5%
2007 Return on assets = 24,427 / 265,850 = 0.092
or 9.2%
2008 Return on assets = 26,213 / 294,479 = 0.089
or 8.9%
2009 Return on assets = 26,428 / 324,876 = 0.081
or 8.1%
Planning period profitability ratios (2010 – 2013)
2010 Return on sales = 25,846.47/ 611,027.55=
4.2%
2011 Return on sales = 24,572.47/ 641,578.93=
3.8%
2012 Return on sales =19,131.88 / 673,657.87=
2.9%
2013 Return on sales = 22,847.11/ 707,340.77=
3.2%
2010 Return on assets = 25,846.47 / 341,119.80 =
7.6%
2011 Return on assets = 24,572.47 / 358,175.79 =
6.9%
2012 Return on assets = 19,131.88 / 376,084.58 =
5.1%
2013 Return on assets = 22,847.11/ 394,888.81 =
5.9%

Analysis: From the results of the pro-forma income statement the return on sales is expected to follow
the trend of the historical profitability ratios and continue to decrease each year. Expect in the final year
the company will be able to be more profitable as the effects of the recession wouldn’t be as great or
even nonexistent by 2013. Furthermore Daktronics is not in 1999 anymore where they had high growth
in earnings and earnings surprises. They have already peaked (2006) and are currently in the phase
where there is decline which corresponds with the fall in stock prices as seen in figure one of the case.
On the other hand the return on assets which peaked in 2007 has consistently fell and is expected to fall
Donald Sheckle 416000322 MGMT3048
up until 2012. The year 2013 is the year the company is expected to increase profits and make
improvements leading them in the right direction following the slump it was in in the pass years.
Therefore in comparing both the historical and planning period for Daktronics profitability ratios they
both followed a similar downward trajectory.

4)

Equity Cash
Flow (in
thousands)
April 30 2010 April 30 April 30 April 30
2011 2012 2013
EBIT $40,144.51 $35,286.84 $27,485.24 $32,042.54
Add Depreciation $25,296.54 $26,497.21 $33,817.63 $35,437.77
Less Capex $24,441.10 $25,663.16 $26,946.31 $28,293.63
Less NWC $5,297.58 $14,518.06 $5,766.63 $17,879.06
Operating Cash flow $35,702.37 $21,602.83 $28,589.92 $21,307.62
Less Taxes $16,192.23 $12,703.26 $10,441.70 $11,458.92
less interest $549.92 $705.74 $673.66 $565.87
Debt Payment $0.00 $0.00 $0.00 $0.00
Debt Issue $0.00 $0.00 $0.00 $0.00
Equity Cash Flow $18,960.21 $8,193.83 $17,474.57 $9,282.83
Required cash balance $20,000.00 $20,000.00 $20,000.00 $20,000.00
Excess cash to pay as -$1,039.79 -$11,806.17 -$2,525.43 -
dividend $10,717.17

Analysis: From the results of the pro-forma equity cash flows there isn’t any pattern to follow the results
fluctuate yearly. The years 2010 and 2012 had the highest operating cash flows and highest equity cash
flows respectively. One of the major reasons for the low equity cash flows in 2011 and 2013 is because of
the big increase in net working capital for those years. Also the company is expected to maintain a 20
million dollar balance on its cash balance. Therefore with this restriction this does not leave any extra
cash available to pay cash dividends. There isn’t any excess cash to pay cash dividends because in each
year the equity cash flow falls below the required balance. Therefore if the company was to pay
dividends they would have to pay them via other methods such as stock dividends.

5) Dividend policy:

Daktronics didn’t always pay out dividends they only began to pay dividends in 2004 when they felt they
reached a sufficient cash flow level. The initial dividend payout was five cents per share in 2004 and was
then increased by 1 – 1.5 cents per share since that period. Over time the dividend payout increased
from around 9% in 2004 up to about 14% in 2009. They follow the practice of either holding the dividend
payout constant or increase the level of payout. In evaluating this dividend policy, it would be justified
once the company is striving and doing well. However based on the situation of the company and other
external factors this policy will not be the best for the company going forward. Factors such as the
recession and the current decreases in profits wouldn’t allow the company to maintain this policy in the
long run. Therefore the dividends should not be increased because the business is not in a position to
increase dividends. Currently they need to retain as much profits as possible which could be used more
effectively in the business as opposed to paying them out in dividends. Over time when the business
regains stability then they can consider an increase. However an advantage of increasing dividends is
that it will make the company more attractive to investors which means more individuals will want to
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invest in the company and others will stay invested in the company because they feel as though they are
being rewarded for their investments. Also increasing dividends will give the impression that the
company is stable since they are able to increase dividends. On the other hand increasing dividends will
decrease retained earnings which is a disadvantage because the company will need the extra retained
earnings to put back into the company itself. In other words increasing retained earnings could restrict
growth in the company. If dividends were to increase it should be distributed in the form of Stock
dividends. Each equity shareholder would receive a certain number of additional shares depending on
the number of shares originally owned by the shareholder. This is a good way to keep investors happy
while not troubling operating cash flows. The firm could give one bonus stock for every ten shares an
investor has. Shareholders should be happy with the increase since they are still benefiting from their
investments. However some shareholder groups may prefer cash dividends as opposed to stock
dividends. Different shareholder groups will react different based on their expectations and wants.

6) Based on the shares outstanding of 41,152 (In thousands) and the firm value of 1,539.22 (In
thousands) the share price is estimated at 0.04 which is low compared to the prices given in the case.
Although in the case the share prices made dramatic drops of for example 21% or 8 dollars a share, it
was no expected to fall to almost next to nothing for a share. The terminal value of EBITDA time 9 and
the constant growth model are below.

All working in excel file:

KE 11.82
PV 1-4 $1,537.45
Terminal value $612,415.6
(EBITDA * 9) 4
PV of terminal value 1.7685044
firm value $1,539.22

Growth model

Growth 3.00%
Equity cash flow year
5 $9,012.45
764.41492
Terminal value 1
0.0032714
NPV 3
Firm value $1,537.45

7) Capital Structure:

The capital structure of Daktronics leans more towards equity financing as opposed to debt financing.
Their growth is primarily financed by retained earnings and new common stock issued. This is beneficial
because it decreases the risk of default on liabilities since debt isn’t the primary source of financing.
Capital structure theory refers to a systematic approach to financing business activities through a
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combination of debt and equity. These theories are the M&M theory, the net income to capital structure
approach and the pecking order theory. The M&M theory is a capital structure approach named after
Franco Modigliani and Merton Miller in the 1950s. It has two propositions, under the first proposition
the value of the firm is not affected by changes in the capital structure. It is affected by earning power
and asset risk. The cash flows of the firm do not change; therefore, value doesn’t change. This mean that
even though Daktronics is being finance safer than other firms it won’t make the company any more
valuable. The second proposition however says that the financial leverage boosts the value of a firm and
reduces WACC. The implication from this theory is because the company uses majority equity financing
the value of the firm would increase in value under this proposition. The net income to capital structure
approach say that the more debt a company uses to finance its growth the more it will add to the value
of the firm. Debt is cheaper than equity because you can deduct the interest on the company taxes.
Therefore, using more debt makes the cost of capital less and in theory increasing the firms’ value. The
implications this theory would have on Daktronics is that it would reduce the value of the firm since they
use majority equity financing to finance growth. Lastly the pecking order theory assumes that companies
prioritize their financing strategy based on the path of least resistance. Internal financing is the first
preferred method, followed by debt and external equity financing as a last resort. This is the pattern that
Daktronics seems to be following. Which is why they are primarily financed by equity then debt comes
into the picture. If Daktronics was to increase debt financing an advantage of this would be an increase
in control over the company. This is because lenders of debt don’t have any say in how the business is
ran. The relationship ends when the debt is repaid but on the other side individuals with shares in a
company may have the ability to influence the company through voting rights. Another advantage would
be the tax deductible effects that debt allows. The disadvantages on the other hand are the increased
fixed payments that the business would need to make in terms of principle and interest. Also there is the
fact that with increase debt the company will need to provide more collateral for if they cannot repay on
the debt.