Mini Case – Super Hardware Canada (SHC)
The financial results of Super Hardware Canada (SHC) are presented below for the year ended at December 31, 2021. The CEO of SHC is hoping to have a 20% increase in sales for 2022. The financial information for 2021 ended is given below.
Income Statement
Super Hardware Canada
For the Year ended December 31, 2021
($1,000)
Sales Revenue (Net) 800
Less: Cost of Goods Sold 600
Gross margin 200
Less Operating Expenses 100
Earnings before Taxes 100
Less: Taxes @ 40% 40
Net Income after Taxes 60
Less: Cash Dividends 20
Retained Earnings (Reinvested Profits) 40
Balance Sheet
Super Hardware Canada
As at December 31, 2021 ($1,000)
Assets Liabilities & Owner’s Equities
Cash 40 Accounts Payable 100
Marketable Securities 10 Taxes Payables 20
Accounts Receivable 150 Other Current Liabilities 5
Inventories 100 Total Current Liabilities 125
Total Current Assets 300 Long Term Debts 200
Fixed Assets 500 Total Liabilities 325
Less: Depreciation 150 Common Shares 150
Net Fixed Assets 350 Retained Earnings 175
Total Assets 650 Total Liabilities & Owner’s Equity 650
Other Information: Estimated by SHC Controller for 2022:
- SHC wants to maintain a minimum cash balance of $50,000 along with an increase in Marketable securities to $15,000.
- All other Income Statement items are assumed to increase by the same 20%.
- New equipment costing $40,000 will be acquired in 2022. Total depreciation for 2022 will be $20,000.
- The Payout and Retention Ratios for 2022 will be the same as 2021.
Required:
Using the Percent of Sales method and Judgmental approach:
- Prepare a pro-forma Income statement for 2022. (6 Marks)
- Prepare Proforma Balance Sheet and External Financing Needs. (8 Marks)
- Calculate two key ratios analysis for each category of:
Liquidity, Activity, Leverage and Performance – and summarize your major conclusion. Be specific(4Marks)
- Assume the Cost of Capital for SHC is 12%.
Determine if SHC was sustainable? (2 Marks)
For your analysis, assume the following industry averages to compare with 2021 results.
Liquidity: Current ratio: 2.1; Quick Ratio 1.2
Activity: Sales to Total Assets (ATO): 1.5; Inventory Turn-over 6 /times/year
Leverage: LTD/Equity: 40% / 60%; Current Liability to Total Asset 20%
Performance: ROS 10% and ROE: 25% and EVA needs to be positive.
Solution – Mini Case – Super Hardware Canada (SHC)
To project the 2022 income statement, a 20% increase in sales and other items is applied (except dividends and taxes).
Step 1: Prepare a pro-forma Income statement for 2022. 
| Item | 2021 ($ ‘000) | 2022 ($ ‘000) | Explanation |
| Sales Revenue (Net) | 800 | 960 | Sales increase by 20% (800 × 1.20) |
| Less: Cost of Goods Sold (COGS) | 600 | 720 | COGS increases by 20% (600 × 1.20) |
| Gross Margin | 200 | 240 | Sales – COGS (960 – 720) |
| Less: Operating Expenses | 100 | 120 | Operating expenses increase by 20% (100 × 1.20) |
| Earnings Before Taxes (EBT) | 100 | 120 | Gross margin – operating expenses (240 – 120) |
| Less: Taxes @ 40% | 40 | 48 | Taxes are 40% of EBT (120 × 0.40) |
| Net Income After Taxes | 60 | 72 | EBT – Taxes (120 – 48) |
| Less: Dividends | 20 | 24 | Same payout ratio (33.3% of net income: 72 × 0.333) |
| Retained Earnings | 40 | 48 | Net income – dividends (72 – 24) |
Step 2: Prepare Proforma Balance Sheet and External Financing Needs
We are assuming a 20% increase in most balance sheet items, with some exceptions: cash balance, marketable securities, and new equipment purchases are specified. We are also incorporating the depreciation value for 2022.
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