Table of Contents

COMPANY OVERVIEW......................................................................................................................................... 2
COMPANY ANALYSIS........................................................................................................................................... 3
DAKTRONICS COMPANY COMMON SIZE INCOME STATEMENT 2007 - 2009.............................................................................3
DAKTRONICS COMPANY COMMON SIZE BALANCE SHEET 2006 -2009...................................................................................4
EQUITY CASH FLOW FOR THE PERIOD 2007 – 2009:..........................................................................................................5
HOW DOES THE COMPANY COMPARE TO INDUSTRY AVERAGE?..............................................................................................5
Liquidity Ratio:......................................................................................................................................................5
Efficiency Ratio:.....................................................................................................................................................7
Profitability Ratio:.................................................................................................................................................8
IS YOUR ANALYSIS CONSISTENT WITH THE STOCK PRICE PERFORMANCE IN FIGURE 1 OF THE CASE?................................................9
DAKTRONICS PRO-FORMA FINANCIAL STATEMENTS AND JUSTIFICATIONS.........................................................11
COMPARISON BETWEEN PAST FINANCIAL RATIOS AND PLANNING PERIOD RATIOS............................................13
HOW MUCH DIVIDEND CAN DAKTRONICS AFFORD TO PAY OUT?.......................................................................15
DIVIDEND POLICY.............................................................................................................................................. 16
ADVANTAGES AND DISADVANTAGES OF INCREASING DIVIDEND............................................................................................17
Advantages.........................................................................................................................................................17
Disadvantages.....................................................................................................................................................17
FRICTO ANALYSIS............................................................................................................................................... 18
PROJECTED EQUITY CASH FLOW & STOCK VALUATION.......................................................................................19
Projected Equity Cash Flow:................................................................................................................................19
Constant Growth Model:.....................................................................................................................................19
EBITDA Times Model:..........................................................................................................................................19
CAPITAL STRUCTURE......................................................................................................................................... 20
ADVANTAGES AND DISADVANTAGES OF INCREASING THE AMOUNT OF DEBT USED...................................................................21
Advantages.........................................................................................................................................................21
Disadvantages.....................................................................................................................................................22
APPENDICES:..................................................................................................................................................... 23
APPENDIX A:.............................................................................................................................................................23
APPENDIX B:.............................................................................................................................................................24
APPENDIX C:.............................................................................................................................................................25
APPENDIX D............................................................................................................................................................. 26
BIBLIOGRAPHY:................................................................................................................................................. 27
Company Overview
Daktronics is the world’s leader in the design, manufacture, and installation of digital billboards,

electronic scoreboards, large-screen video displays, and large format LED text and graphics

displays, related control systems, services, and products. Additionally, the company’s products

appear at many locations in the local and international markets. Daktronics operates five business

segments: Love Events, Commercial, School & Theatres, Transportation, and International. Its

network spans several countries in 26 remote offices and over 7500 endpoints. As technology

and demands of customers became increasingly complex, so did the company’s products and

services.
Company Analysis

Daktronics Company common size income statement 2007 - 2009

2009 2008 2007

Sales 100.00% 100.00% 100.00%
Cost of sales ( excluding depreciation) 73.30% 70.46% 70.78%
Gross Profit 26.70% 29.54% 29.22%

SG&A expenses ( excluding amortization) 15.17% 17.66% 17.52%

Other operating (income)/expense,net 0.50% -0.21% 0.28%
EBITDA 11.03% 12.09% 11.43%

Depreciaton 4.15% 4.16% 3.07%

Amortization 0.05% 0.06% 0.12%
EBIT 6.83% 7.86% 8.24%

Interest Expense 0.04% 0.28% 0.17%

Interest (income) -0.36% -0.35% -0.42%
Pretax Income 7.14% 7.93% 8.49%

Income taxes 2.60% 2.68% 2.85%

Net Income 4.54% 5.25% 5.64%
Table 1 Shows Common Size Income Statement for Daktronics 2007-2009

Figure 1 depicts that the cost of sales has little to no variance during the historical data,

averaging at 71.51%. The table revealed that the operating income before interest and tax has

decreased from 2007 which resulted from the 2.52% increase in the cost of sales from 2007-

2008. This can be attributed to the significant rise in operating expenses. Daktronics’s gross

profit has declined from 2007 which would indicate that the performance of operational

efficiency has been declining. Notably, some external factors during this period would have some

negative effects on the firm. Furthermore, the firm’s interest expense has decreased significantly

from 2008, suggesting that the firm reduced its long-term debt remarkably. The firm’s net

income fell by 1.10% which is not a significant drop, hence, the overall performance of the firm

shows little variance, there are no indicators that the firm is at risk.
Daktronics Company common size Balance Sheet 2006 -2009
2009 2008 2007 2006
Cash 11.24% 3.17% 0.97% 13.51%
Accounts receivables, net 18.90% 19.19% 21.32% 23.10%
Inventories 15.82% 17.16% 17.24% 15.58%
Prepaid expenses 1.72% 1.63% 1.90% 0.96%
Deferred taxes 4.62% 3.23% 2.92% 3.12%
Other current assets 11.41% 11.89% 11.31% 15.33%
Total Current Assets 63.71% 56.27% 55.67% 71.60%

PP&E,net 27.53% 33.12% 32.40% 20.36%

Long term receivables, less current maturities 4.89% 5.72% 4.22% 4.39%
Goodwill 1.40% 1.60% 1.66% 1.36%
Investment in affiliates,differed taxes intangibles, & other 2.48% 3.29% 6.06% 2.29%
Total Assets 100.00% 100.00% 100.00% 100.00%

Accounts Payable 9.32% 10.71% 9.82% 9.98%

Accrued expenses and warranty obligations 10.94% 8.86% 8.22% 7.73%
Other current Liabilities 11.27% 15.46% 20.74% 16.28%
Total Current Liabilities 31.53% 35.03% 38.77% 33.99%

Revolver 0.00% 0.00% 0.00% 0.00%

Long term debt 0.01% 0.02% 0.22% 0.07%
Long term marketing and warranty obligations,deferred taxes 3.24% 2.72% 3.19% 3.03%
Total Liabilities 34.77% 37.77% 42.18% 37.09%

Common stock,no par 8.58% 8.71% 8.26% 9.81%

Paid in capital 4.28% 3.53% 2.80% 1.75%
Retained earnings 52.54% 50.23% 46.82% 51.39%
Treasury stock, at cost 0.00% 0.00% 0.00% 0.00%
Accumulated other comprehensive loss -0.02% -0.23% -0.05% -0.03%
Total Equity 65.23% 62.23% 57.82% 62.91%

Total Liabilities and Equity 100.00% 100.00% 100.00% 100.00%

Table 2 Shows Common Size Balance Sheet for Daktronics 2006-2009

An analysis of the pattern of financing shows that the firm utilizes more equity financing than

debt. Daktronics' working capital is adequate to maintain its working capital. From the statement

above, the total current assets increased by 8.04% from 2007 to 2009 while the total current

liabilities have decreased by 7.25%. This indicates that the firm has a highly satisfactory liquidity

position. Additionally, from 2007 the total fixed assets have declined by 8.04% while the total

long-term liabilities have decreased by 0.17%. It is important to note that in 2007 the firm’s cash

moved from 13.51% to 0.97%, this can be attributed to external issues (recession) affecting the

firm’s profitability around that period. Overall, the firm has recovered from those losses. It can

meet their long-term and short-term obligations and has proven to be profitable during this

period.
Equity cash flow for the period 2007 – 2009:

2009 2008 2007

EBIT $ 39,729,000.00 $ 39,292,000.00 $ 35,696,000.00
DEPRECIATION $ 24,133,000.00 $ 20,806,000.00 $ 13,298,000.00
CAPEX $ (22,888,000.00) $ (33,916,000.00) $ (58,743,000.00)
CHANGE IN NET WORKING CAPITAL $ 41,998,000.00 $ 17,641,000.00 $ (30,026,000.00)
OPERATING CASH FLOW $ (1,024,000.00) $ 8,541,000.00 $ 20,277,000.00
TAXES $ (15,125,000.00) $ (13,413,000.00) $ (12,355,000.00)
INTEREST $ (244,000.00) $ (1,423,000.00) $ (725,000.00)
DEBT PAYMENT $ (546,000.00) $ (563,000.00) $ (102,000.00)
DEBT ISSUANCE $ - $ 24,615,000.00 $ 24,615,000.00
EQUITY CASH FLOW $(16,939,000.00) $ 17,757,000.00 $ 31,710,000.00
Table 3 Shows Equity Cash Flow for Daktronics 2007-2009

Figure 3 depicts the cash available for the firm’s shareholders in the study period. During this

period the firm repaid its long-term debt which resulted in an outflow of cash. They also had

huge changes in working capital resulting in an outflow. This resulted in limited funds for

shareholders during 2009. However, it is also important to note that in 2007 and 2008 the firm

had a positive equity cash flow, meaning that in that year the firm could have returned “cash” to

shareholders if they so choose.

How does the company compare to industry average?

The analysis of the case required several financial ratios to be calculated to better compare the

company to the industry average. Thus, these calculations can be found in Appendix A; however,

three ratios were selected to be discussed that would paint a better picture of how Daktronics is

operating when compared to the industry standards.

Liquidity Ratio:

liquidity ratios measure the company’s ability to meet short-term obligations. If a firm can meet

these short-term obligations without running into financial problems, creditors and investors
would be more inclined to invest in the company. The liquidity ratio chosen to be highlighted is

the current ratio; hence, the chart below depicts the current ratios for the firm comparing it to the

industry average.

Current Ratio
2.50

2.00
Current Ratio

1.50

1.00

0.50

0.00
2006 2007 2008 2009
Years

Daktronics Industry

Figure 1 Current Ratios Comparing the Company to Industry Average using Historical data 2006 – 2009

As seen in figure 4, based on Daktronics’s financial statements the company had improved on its

ability to meet its short-term obligations. The current ratio indicates that Daktronics is

performing above the industry benchmark. Thus, the firm can be said to be liquid and not at risk

of paying off immediate debt.

However, in 2009 the industry surpassed Daktronics with a current ratio of 2.10; which can be

attributed to slow-moving or obsolete inventories due to external or internal factors or delays in

collecting receivables. However, this decrease is not alarming to the firm as it was only a 0.08

decrease.
Efficiency Ratio:

It is important to note that the efficiency ratios show how effective the firm manages by

comparing the measurement of the average number of days or time required for a business to

convert its inventory into sales. Inventory turnover is a measure of how efficiently a company

can control its merchandise, so it is important to have a high turnover.

Day Sales of Inventory

20.00
18.00
16.00
14.00
12.00
Day Sales

10.00
8.00
6.00
4.00
2.00
0.00
2006 2007 2008 2009
Years

Daktronics Industry

Figure 2 Day Sales of Inventory Comparing the Company to Industry Average using Historical data 2006 - 2009

In comparison to the industry standards, based on the calculations Daktronics has not been able

to meet the industry standards; however, this lower day sales of inventory relative to the industry

indicates that the company is efficiently managing its products when compared to the industry.

On the other hand, it can also indicate that it is not carrying enough inventories to keep up with

demand. There was not sufficient data provided by the case to calculate the DSI for 2006;

however, on average Daktronics takes approximately 4 days to turn over its inventory while the
industry standard takes approximately 15 days on average. Hence, it can, therefore, be deduced

that the firm is managing its inventory effectively and efficiently.

Profitability Ratio:

In evaluating Daktronics Return on Assets (ROA) ratio, the higher the percentage, the more

effective the firm is at controlling its assets to help produce profits. The ROA is a profitability

ratio that measures how efficiently a business can convert its investments in assets to net profits

before interest and taxation (Atrill et al., 2015.).

Return on Assets
10.00%
9.00%
8.00%
7.00%
Return on Assets

6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2006 2007 2008 2009
Years

Daktronics Industry

Figure 3 Return on Assets Comparing the Company to Industry Average using Historical data 2006 - 2009

Over the 4 years analysed, Daktronics has been underperforming. They have not been effective

in converting their investments into profits. It is important to note that there was not sufficient

data to calculate the 2006 ROA; however, from the calculations, although Daktronics has been

underperforming compared to the industry standard, the change is not a significant one. In 2009

the firm’s ROA outperformed the industry, therefore it can be concluded that management has
become more adept at allocating the company’s resources more efficiently, i.e. the firm in its

most recent fiscal year is converting its investments into profits outperforming the industry

standards.

Is your analysis consistent with the stock price performance in figure 1

of the case?

Figure 4 Shows Monthly Closing Price of the Firm's Stocks 2005-2010

The figure above displays the performance of Daktronics for over 10 years. Based on the

company’s analysis, Daktronics was a major shareholder in almost all segments within which

they were operational (live events, commercial, school and theatres, international, and

transportation). Consequently, the company analysis completed is not consistent with the stock

performance in the above figure, from the analysis the conclusion drawn is that Daktronics
stocks are undervalued; however, externalities such as the economic recession is a major factor

affecting the value of the stock prices.

Daktronics Pro-forma Financial Statements and
Justifications
In the case study, several assumptions were given that were used to forecast the income

statement, balance sheet, and equity cash flow of Daktronics for a projected 4 years. These

assumptions were used because according to the case, the staff gathered the necessary

information. Although forecasting these financial statements is guesswork, the staff would have

internal insight into how the company truly operates. Hence, the projections were made based on

assumptions of the individuals who know the company best. Additional comments for pro forma

statements can be seen in the appendices.

Figure 5 Shows Assumptions used for the Pro Forma Statements

 Daktronic Projected Income Statement 2010 - 2013
2010 2011 2012 2013
Sales $ 396,300,000.00 $ 386,000,000.00 $ 424,600,000.00 $ 467,060,000.00
Cost of sales ( excluding depreciation) $ 283,410,408.36 $ 276,044,455.28 $ 303,648,900.81 $ 334,013,790.89
Gross Profit $ 112,889,591.64 $ 109,955,544.72 $ 120,951,099.19 $ 133,046,209.11

Research and Development $ 15,852,000.00 $ 15,440,000.00 $ 16,984,000.00 $ 18,682,400.00

SG&A expenses ( excluding amortization) $ 51,519,000.00 $ 50,180,000.00 $ 55,198,000.00 $ 60,717,800.00
Other operating (income)/expense,net $ 1,019,000.00 $ 1,019,000.00 $ 1,019,000.00 $ 1,019,000.00
EBITDA $ 44,499,591.64 $ 43,316,544.72 $ 47,750,099.19 $ 52,627,009.11

Depreciaton $ 13,474,200.00 $ 13,124,000.00 $ 14,436,400.00 $ 15,880,040.00

Amortization $ 315,000.00 $ 315,000.00 $ 315,000.00 $ 315,000.00
EBIT $ 30,710,391.64 $ 29,877,544.72 $ 32,998,699.19 $ 36,431,969.11

Interest Expense $ 1,288.00 $ 1,288.00 $ 1,288.00 $ 1,288.00

Interest (income) $ 365,010.00 $ 702,940.26 $ 848,261.83 $ 975,743.47
Pretax Income $ 31,074,113.64 $ 30,579,196.98 $ 33,845,673.02 $ 37,406,424.58

Incometaxes $ 10,565,198.64 $ 10,396,926.97 $ 11,507,528.83 $ 12,718,184.36

Net Income $ 20,508,915.00 $ 20,182,270.01 $ 22,338,144.20 $ 24,688,240.23
Diluted Weighted AverageShares 41,152,000 41,152,000 41,152,000 41,152,000
EPS $ 0.50 $ 0.49 $ 0.54 $ 0.60
Dividends $ 4,115,200.00 $ 4,115,200.00 $ 4,115,200.00 $ 4,115,200.00
Additions to Retained Earnings $ 16,393,715.00 $ 16,067,070.01 $ 18,222,944.20 $ 20,573,040.23
Table 4 Shows Pro Forma Income Statement 2010 - 2013

Daktronics Projected Balance Sheet 2010 - 2013

2010 2011 2012 2013
Cash $ 70,294,026.22 $ 84,826,183.17 $ 97,574,347.18 $ 112,125,129.20
Accounts receivables, net $ 46,169,496.23 $ 44,969,532.03 $ 49,466,485.23 $ 54,413,133.76
Inventories $ 39,002,172.51 $ 37,988,490.01 $ 41,787,339.01 $ 45,966,072.91
Prepaid expenses $ 5,587,000.00 $ 5,587,000.00 $ 5,587,000.00 $ 5,587,000.00
Deferred taxes $ 15,017,000.00 $ 15,017,000.00 $ 15,017,000.00 $ 15,017,000.00
Other current assets $ 26,837,248.44 $ 26,139,737.31 $ 28,753,711.04 $ 31,629,082.15
Total Current Assets $ 202,906,943.40 $ 214,527,942.52 $ 238,185,882.46 $ 264,737,418.01

PP&E,net $ 91,804,800.00 $ 94,120,800.00 $ 96,668,400.00 $ 99,470,760.00

Long term receivables, less current maturities $ 15,879,000.00 $ 15,879,000.00 $ 15,879,000.00 $ 15,879,000.00
Goodwill $ 4,549,000.00 $ 4,549,000.00 $ 4,549,000.00 $ 4,549,000.00
Investment in affiliates,differed taxes intangibles, & other $ 5,656,000.00 $ 5,656,000.00 $ 5,656,000.00 $ 5,656,000.00
Total Assets $320,795,743.40 $ 334,732,742.52 $360,938,282.46 $ 390,292,178.01

Accounts Payable $ 23,167,397.53 $ 22,565,267.34 $ 24,821,794.08 $ 27,303,973.49

Accrued expenses and warranty obligations $ 21,632,193.31 $ 21,069,963.71 $ 23,176,960.08 $ 25,494,656.09
Other current Liabilities $ 37,156,437.55 $ 36,190,726.45 $ 39,809,799.10 $ 43,790,779.01
Total Current Liabilities $ 81,956,028.39 $ 79,825,957.51 $ 87,808,553.26 $ 96,589,408.58

Revolver $ - $ - $ - $ -
Long term debt $ 23,000.00 $ 23,000.00 $ 23,000.00 $ 23,000.00
Long term marketing and warranty obligations,deferred taxe
$ s10,512,000.00 $ 10,512,000.00 $ 10,512,000.00 $ 10,512,000.00
Total Liabilities $ 92,491,028.39 $ 90,360,957.51 $ 98,343,553.26 $ 107,124,408.58

Common stock,no par $ 27,872,000.00 $ 27,872,000.00 $ 27,872,000.00 $ 27,872,000.00

Paid in capital $ 13,898,000.00 $ 13,898,000.00 $ 13,898,000.00 $ 13,898,000.00
Retained earnings $ 187,098,715.00 $ 203,165,785.01 $ 221,388,729.21 $ 241,961,769.43
Treasury stock, at cost $ (9,000.00) $ (9,000.00) $ (9,000.00) $ (9,000.00)
Accumulated other comprehensiveloss $ (555,000.00) $ (555,000.00) $ (555,000.00) $ (555,000.00)
Total Equity $ 228,304,715.00 $ 244,371,785.01 $ 262,594,729.21 $ 283,167,769.43
Total Liabilities and Equity $320,795,743.40 $ 334,732,742.52 $360,938,282.46 $ 390,292,178.01
Table 5 Shows Pro Forma Balance sheet from 2010 -2013
Comparison between past financial ratios and planning
period ratios
The below graphs depict selected ratios to compare the historical data with the projected data.

Current Ratios
2.69 2.71 2.74
2.48

2.11
2.02

1.61
1.44

2006 2007 2008 2009 2010 2011 2012 2013

Figure 6 Shows Current Ratios for Historical Period and Projected Period

Day Sales of Inventory

12.00

10.00

8.00

6.00

4.00

2.00

0.00
2006 2007 2008 2009 2010 2011 2012 2013
Figure 7 Shows Day Sales of Inventory for Historical Period and Projected period
 Return on Assets
0.07

0.06

0.05

0.04

0.03

0.02

0.01

0.00
2006 2007 2008 2009 2010 2011 2012 2013
Figure 8 Shows Return on Assets for Historical Period and Projected Period

From the data, one can assume that the business has grown and would continue to grow in the

near future. It was predicted that sales would fall, however, that would not harm the profitability

of the firm. The firm’s overall performance is expected to increase. Daktronics is expected to

maintain a sustainable current ratio for the next four years, which is an improvement compared

to the historical ratios. This is good news for the firm considering the macroeconomic issues in

the external environment. Furthermore, using the other ratios as parameters of the firm’s

performance, the company is expected to be significantly more profitable than previous years.

The day sales may have increased, however, the return on assets has increased as well.

Therefore, it can be deduced that Daktronics would remain a healthy company having little to no

solvency issues.
How much Dividend can Daktronics Afford to Pay Out?
Daktronics Funds Available for Distribution, 2010 - 2013
Projected
2010 2011 2012 2013
How muchmore shouldDaktronics pay as dividend?
FCFE $ 18,312,105.00 $ 17,709,329.75 $ 19,488,282.36 $ 21,456,136.75
After tax Interest Income $ 240,906.60 $ 463,940.57 $ 559,852.81 $ 643,990.69
Projected Beginning Cash Balance $ 70,294,026.22 $ 84,826,183.17 $ 97,574,347.18 $ 112,125,129.20
Less: Minimum Cash Balance $ (20,000,000.00) $ (20,000,000.00) $ (20,000,000.00) $ (20,000,000.00)
Excess Cash $ 68,847,037.82 $ 82,999,453.49 $ 97,622,482.35 $114,225,256.65
Available for Paying Dividends $ 36,501,000.00 $ 82,999,453.49 $ 97,622,482.35 $ 114,225,256.65
Less: Dividends Currently being Paid $4,115,200.00 $4,115,200.00 $4,115,200.00 $4,115,200.00
Available for Increasing Dividends $ 87,159,142.82 $ 100,708,783.23 $ 117,110,764.72 $ 135,681,393.40
(Divs/FCFE)*100 22.47 23.24 21.12 19.18
(Divs/Available for increase dividends)*100 4.72 4.09 3.51 3.03
Figure 9 Highlights the Projected Dividend Pay-out Amount

Using the calculations from the projected equity cash flow statement, the estimated excess cash

and dividend pay-out amount were determined. According to the case study, Daktronics was

following a trend of paying out dividend hence, using the excess cash, they should continue that

trend for shareholders to maintain their confidence in the firm. Additionally, it is important to

note that 2010 has the lowest excess cash, and one of the major reasons for this was its low net

working capital for that year. However, although there is a restriction on the minimum cash

balance required, the firm would be able to pay cash dividend comfortably for the projected

years as highlighted in the above table.

Dividend Policy
Currently, the dividend policy for Daktronics is a conservative one. The firm would pay 10cents

per share which was very costly to the firm. Every year the dividend amount would increase by 1

to 1.15 cents each year. Thus, in keeping with the company’s policy, they should continue paying

dividends at an increased rate. Below is Daktronics’s yearly profits per share and payout ratio

from 2005-2009.

Figure 10 Shows Dividend Pay-out Ratio, 2005-2009

As per the aforementioned and based on the projected financials, Daktronics has the necessary

cash flow level to increase its dividend. The company’s projected current ratio is above 2.48

which means that the company has enough current assets to meet its immediate liabilities. Put

simply, Daktronics has a huge current asset base with little liabilities. Additionally, the firm has

no intention to invest in any projects, acquisitions, or international markets. Thus, Daktronics

should use their excess cash to increase and pay a special dividend in the form of cash to appease

their shareholders, letting them know the company is in fact in good health. Due to the capital

structure of the firm (mostly equity financing), an increase in dividend during a recession would

reaffirm to shareholders that the company is in good health; therefore, gaining even more
confidence. This would attract new long-term shareholders and the older investors would be even

more committed to the company.

Advantages and Disadvantages of Increasing Dividend

Advantages

1. An advantage of increasing dividends is that it can be used as a tool to convey the

company’s earnings and cash flow outlook positively. This can attract investors, by

assuring them a reliable source of earnings, even if the market price of the share drops.

2. Another advantage of increasing dividend is that investors who have invested in the

company on a long-term basis gain confidence in the company,(is a word missing here?)

dividend is the only source of income for shareholders apart from capital appreciation of

stocks. By increasing dividends, a company may find that current shareholders want to

reinvest into the company, which is a good sign for the company.

3. Shareholders, who look forward to regular dividend income, would prefer a company

with stable dividend payouts, to a company with fluctuating dividends.

4. Companies who pay regular dividends tend to attract reputable investors who are seeking

such returns on their investments will also increase external finances.

5. The loyalty of the company finds goodwill of shareholders towards the company

increases with a stable dividend policy.

Disadvantages

1. Decreased retained earnings

2. Increasing dividend payout can limit a Company’s Growth because paying dividends

would result in a reduction of usable cash which may limit the company’s growth

potential as the firm would have less money to invest in new viable projects.
 3. It would be a disadvantage to the company to maintain this policy if macro-economic

factors affect operations.

FRICTO Analysis
The firm’s capital is underutilising its debt capacity, below is an in-depth analysis of firm’s

capital structure and an alternative option so it would be able to take leverage of debt.

Flexibility of future financing choices

F When increasing dividend, Daktronics has high flexibility; the company has
Flexibility maintained a positive gross profit which signifies that they are financially healthy.
Even when facing external difficulties, they were able to maintain a positive gross
profit. The company is a low financially leveraged company; therefore, if in the
future they need financing it would be easy to change their capital structure.
Additionally, the firm has been successful in paying back its debts; thus, if there is
a need for additional financing, their creditworthiness would not prevent their
borrowing capacity.
Risk of increasing dividends
R Although an increased dividend will be a rewarding and profitable investment for
Risk shareholders, the cashflow coverage of fixed payments is adequate. However,
Daktronics may face interest rate risk and the inability to pay dividends. High-
interest rate risk would directly affect the cash flow of the firm which would, in
turn, have an adverse effect on the dividend payout.

Impact of increased dividends on income

I If the dividend is raised the estimated value would be even lower. Daktronics has
Income reported positive operating income, net income, and diluted earnings per share in
the last 4 years. However, a concern would be if sales are estimated to drop
significantly and the dividend is raised, the company would risk losses in
operating income, net income, and diluted earnings per share, which could put the
company at risk coming out of an economic recession.
Impact of dividends on control of the company
C The impact of dividends on the control of the company increases shareholder
Control equity. Hence, Daktronics forfeits a fraction of its ownership to the public. By
doing this, Daktronics will be accountable to the public and their decisions would
be altered because of this. On the other hand, if the firm were to use debt
financing this would allow more control for the management as there is no
accountability to shareholders. Both options will give up some level of control
over the firm, but currently, the firm’s management has little control over its
decisions.
Tax effects of increased dividends
T The tax effects of increasing dividends would cause the real tax rate for
Timing shareholders to increase. This would result from the double taxation that occurs:
the first tax applies to the income of the firm, the second to the dividend income.
Therefore, shareholders may prefer low dividends in exchange for capital gains.
 . Other issues raised by increased dividends
O Daktronics’ management is not willing to issue additional debt; however, the
Other company’s stock price is expected to rise over the next few years. Thus, the firm
should consider convertibles (delayed equity). That way the firm’s management
would have control of major decisions being made in the firm.
Table 6 Shows FRICTO Analysis of the Firm

Projected Equity Cash Flow & Stock Valuation

Based on the case in 2009 the stock price was at an all-time low at $6.55, compared to this share

price the estimated price for projected years is higher. In the case, share price made a dramatic

drop during the historical periods, however, from the estimates, one can deduce that the firm

recovered well from the fall in sales. Below is the equity cash flow statement for projected years

and the terminal value using both a constant growth model and a multiple of EBITDA of 9.

Projected Equity Cash Flow:

- 2010 2011 2012 2013
EBIT $ 30,710,391.64 $ 29,877,544.72 $ 32,998,699.19 $ 36,431,969.11
DEPRECIATION $ 13,474,200.00 $ 13,124,000.00 $ 14,436,400.00 $ 15,880,040.00
CAPEX $ (15,852,000.00) $ (15,440,000.00) $ (16,984,000.00) $ (18,682,400.00)
CHANGE IN NET WORKING CAPITAL $ (16,407,915.00) $ (13,751,070.01) $ (15,675,344.20) $ (17,770,680.23)
OPERATING CASH FLOW $ 28,332,591.64 $ 27,561,544.72 $ 30,451,099.19 $ 33,629,609.11
TAXES $ (10,565,198.64) $ (10,396,926.97) $ (11,507,528.83) $ (12,718,184.36)
INTEREST $ (1,288.00) $ (1,288.00) $ (1,288.00) $ (1,288.00)
DEBT PAYMENT $ 546,000.00 $ 546,000.00 $ 546,000.00 $ 546,000.00
DEBT ISSUANCE $ - $ - $ - $ -
EQUITY CASH FLOW $ 18,312,105.00 $ 17,709,329.75 $ 19,488,282.36 $ 21,456,136.75
Table 7 Shows Projected Equity Cash Flows

Constant Growth Model:

PV of Explicit FCF $ 59,414,780.69
PV of TV $ 341,361,313.56
Total Enterprise Value $ 400,776,094.26
Less Debt $ (23,000.00)
Cash $ 20,000,000.00
Equity Value $ 420,753,094.26
# of Shares 41 152 000
Share Price $ 10.22
Table 8 Shows Terminal Value Using the Constant Growth Model

EBITDA Times Model:

TV $ 470,808,082.00
PV of Explicit $ 326,582,423.77
Total Enterprise Value $ 797,390,505.78
Less Debt $ (23,000.00)
Cash $ 20,000,000.00
Equity Value $ 817,367,505.78
# of shares 41 152 000
Share Price $ 9.86
Table 9 Shows Terminal Value Using the EBITDA Multiple Model

Capital Structure

Capital Structure of Daktronics

37.95% Debt
Equity

62.05%

According to the historical average of Daktronics’s equity and debt, the firm utilises a low

leveraged capital structure. That is Daktronics finances its operations by issuing stock and

retained earnings maintaining a conservative capital structure approach. It is also important to

note that there are almost equal debt and equity following the trend. However, the firm’s

approach is proven sustainable for the firm.

There are implications of the various theories of capital structure for Daktronics’ use of debt.

These theories are as follows:

 The Pecking order theory – The key element of this theory is that companies prefer to use

internal financing and if necessary, would consider dept and equity financing as

alternatives. Daktronics is seemingly a profitable firm and therefore its needs for external
 financing i.e. debt financing is low. Consequently, if Daktronics were to increase its debt

financing it would not only be a cheaper form of financing, but it would increase the

amount of control the company has in making major decisions and reduce any agency

problems. Therefore, Daktronics can create its own dynamic capital structure that works

best for them.

 The net income capital approach – Durand (1952) states that changes in financial

leverage would lead to a change in the cost of capital. In short, if the ratio of debt in the

capital structure increases, the Weighted Average Cost of Capital (WACC) decreases;

hence the value of the firm decreases. Based on the assumptions of this theory; the

implications of increasing the firm’s debt as a financing mechanism would, in fact, lower

the value of the firm; however, investor's risk perception of the firm would not be

affected.

 Traditional Approach – assumes that the cost of capital is a function of the capital

structure. The special thing about this approach is that it believes in an optional capital

structure. This implies that at a particular ratio of debt and equity, the cost of capital is

minimized, and the value of the firm is maximized. So, as you introduce more debt

financing the WACC also increases, because it may cause the equity holders to become

more concerned as they are subjected to more risk as debt increases, that is, higher

interest being paid and therefore dividends are subjected to more risk of not being paid.

As a result, managers need to find the optimal gear which is the smallest WACC so that

they can maximize on Daktronics value. As the firm’s capital structure is now,

shareholders' risk perception is unchanged similarly with the level of equity they can get

a return on their investment seeing that the level of debt is low.

Advantages and Disadvantages of Increasing the amount of debt used

Advantages

 Tax shield – interest payments are tax deductible

 Confidentiality – firms are not required to publicly disclose financing plans; thus,

competitors are not easily made aware of their future plans.

 Ownership – avoids dilution of ownership of the firm, existing shareholders percentage

of ownership would decrease as the firm decide to issue additional shares.

Disadvantages

 Cash flow – fixed payments of interest reduces the cash flow of the firm, which can

jeopardize the financial stability of the firm.

 Credit rating – if at any point the firm fails to repay its debt on time, it will affect their

credit rating, which may affect its chances of securing future loans

 Imposed restrictions – If Daktronics were to increase its debt financing, lenders will

require collateral in the event the firm defaults. Another restriction that lenders may

require is that of covenant which can include restrictions on additional funding or even

paying dividend which would affect the overall firm’s value.


Appendices:
Appendix A:
Key Financial Ratios comparing Daktronics and the Industry

Key Financial Rations for Daktronics and theIndustry

Years 2009 2008 2007 2006
Daktronics Industry Daktronics Industry Daktronics Industry Daktronics Industry

Current 2.02 2.10 1.61 1.20 1.44 1.20 2.11 1.10

Quick 1.52 1.4 1.12 2.00 0.99 1.90 1.65 1.90
Current Liabilities/Net Worth 48.34% 55.60% 56.29% 62.10% 67.06% 66.80% 54.03% 72.00%
Current Liabilities/Inventory 166.79% 191.30% 182.52% 231.00% 181.83% 244.80% 147.15% 216.70%
Total Liabilities/Net Worth 53.31% 76.50% 60.70% 81.30% 72.96% 96.70% 58.95% 106.60%
Liquidity Ratios Fixed Assets/Net worth 37.61% 32.50% 45.73% 35.60% 48.76% 37.30% 29.75% 45.60%

Day Sales of Inventory 6.32 14.1 5.83 18.20 5.80 15.20 0.00 14.80
Efficiency Ratios Sales/ Net working Capital 3.11 5.2 4.71 7.70 5.92 7.10 0.00 6.60

Debt Ratio Debt to Equity 0.53 0.61 0.73 0.59

Return on Sales 6.83% 1.80% 7.86% 3.10% 8.24% 3.40% 0.00% 3.40%
Return on Assets 4.54% 3.50% 5.25% 7.10% 5.64% 7.10% 0.00% 8.70%
Operating Profitability Ratios Return on Net Worth 6.96% 7.10% 8.43% 14.60% 9.75% 14.90% 0.00% 20.00%

Earnings per Share 0.62 0.63 0.59 -

Price Ratios Priceto Earnings 19.26 8.08 31.47 25.50
Appendix B:
Projected Key Financial Ratios for Daktronics

Key Financial Ratios for Daktronics

Years 2010 2011 2013 2014
Current 2.48 2.69 2.71 2.74
Quick 0.51 0.53 0.54 0.56
Current Liabilities/Net Worth 0.36 0.33 0.33 0.34
Current Liabilities/Inventory 2.10 2.10 2.10 2.10
Total Liabilities/Net Worth 0.41 0.37 0.37 0.38
Fixed Assets/Net worth 0.52 0.49 0.47 0.44

Day Sales of Inventory 10.16 10.16 10.16 10.16

Sales/ Net working Capital 3.28 2.87 2.82 2.78

Debt to Equity 0.41 0.37 0.37 0.38

Return on Sales 0.08 0.08 0.08 0.08

Return on Assets 0.06 0.06 0.06 0.06
Return on Net Worth 0.09 0.08 0.09 0.09

Earnings per Share $ 0.50 $ 0.49 $ 0.54 $ 0.60

Appendix C:

Cash Balance Estimates for Projected Years

2010 2011 2012 2013

Net Income $ 20,508,915.00 $ 20,182,270.01 $ 22,338,144.20 $ 24,688,240.23
Add Depreciation $ 13,474,200.00 $ 13,124,000.00 $ 14,436,400.00 $ 15,880,040.00
Change Accounts Receivable $ 15,242,503.77 $ 1,199,964.20 $ (4,496,953.20) $ (4,946,648.52)
Change Inventory $ 12,397,827.49 $ 1,013,682.51 $ (3,798,849.00) $ (4,178,733.90)
Change Other Current Assets $ 10,218,751.56 $ 697,511.13 $ (2,613,973.73) $ (2,875,371.10)
Change Account Payable $ (7,105,602.47) $ (602,130.19) $ 2,256,526.73 $ 2,482,179.41
Change Accrued Expenses $ (13,915,806.69) $ (562,229.60) $ 2,106,996.37 $ 2,317,696.01
Change Other Current Liabilities $ 547,437.55 $ (965,711.09) $ 3,619,072.65 $ 3,980,979.91
Chang in investment in affiliates $ 2,392,000.00 $ - $ - $ -
CapEx $ (15,852,000.00) $ (15,440,000.00) $ (16,984,000.00) $ (18,682,400.00)
Dividends $ (4,115,200.00) $ (4,115,200.00) $ (4,115,200.00) $ (4,115,200.00)
Previous Cash Balance $ 36,501,000.00 $ 70,294,026.22 $ 84,826,183.17 $ 97,574,347.18
Ending Cash Balance $ 70,294,026.22 $ 84,826,183.17 $ 97,574,347.18 $ 112,125,129.20
Appendix D

Comparison of Historical Ratios and Projected Ratios

Historical Ratios ProjectedRatios

Years 2006 2007 2008 2009 2010 2011 2012 2013
Current 2.11 1.44 1.61 2.02 2.48 2.69 2.71 2.74
Quick 1.65 0.99 1.12 1.52 0.51 0.53 0.54 0.56
Current Liabilities/Net Worth 0.54 0.67 0.56 0.48 0.36 0.33 0.33 0.34
Current Liabilities/Inventory 1.47 1.82 1.83 1.67 2.10 2.10 2.10 2.10
Total Liabilities/Net Worth 0.59 0.73 0.61 0.53 0.41 0.37 0.37 0.38
Liquidity Ratios Fixed Assets/Net worth 0.30 0.49 0.46 0.38 0.52 0.49 0.47 0.44

Day Sales of Inventory 0.00 5.80 5.83 6.32 10.16 10.16 10.16 10.16
Efficiency Ratios Sales/ Net workingCapital 0.00 5.92 4.71 3.11 3.28 2.87 2.82 2.78

Debt Ratio Debt to Equity 0.59 0.73 0.61 0.53 0.41 0.37 0.37 0.38

Return on Sales 0.00 0.08 0.08 0.07 0.08 0.08 0.08 0.08
Return on Assets 0.00 0.06 0.05 0.05 0.06 0.06 0.06 0.06
Operating Profitability Ratios Return on Net Worth 0.00 0.10 0.08 0.07 0.09 0.08 0.09 0.09

Price Ratios Earnings per Share - 0.59 0.63 0.62 0.50 0.49 0.54 0.60
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