HOLA-KOLA (2)

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HOLA –KOLA The Capital Budgeting Decision

EXECUTIVE SUMMARY

This case is about a Mexican company, named – Bebida Sol. The company is looking into the possibilities of launching a

new product – HOLA KOLA. The company has been into the soft drinks market, since 1998. Mexico has the highest per

capita consumption of carbonated soft drinks in the world (163 litres). Now, since Mexico has the highest rate of obesity,

the owner, Mr. Antonio Ortega , sees a potential market of their new product. The product is supposed to be a low priced,

zero-calorie carbonated soft drink. The company wishes to target the low and medium class population, as because, the

branded low-calorie soda consumers were either from the middle or the high class. The rest usually consumed the

regular, high sugar, carbonated soft drinks.

Mr. Antonio is evaluating on various aspects, based on which, he would be in a position to take a decision, whether to

invest in his new venture or not. His company has dramatical rise in sales over the past 3 years. Further, even without

any addition to his business strategy, he has seen significant increase in the net profit margin. The company, having a

solid financial resource, built over time, is set to take a call, based on the various Financial analysis, whether to invest or

not. Based on these assumptions, Mr. Antonio has hired a marketing consultant, paying him a hefty 5 million pesos,

shortly after his report submission, which took around 2 months to complete. Based on the report, the company will now

evaluate the various problems which may arise during the business operations, and how would they possibly get

solutions to the most relevant one. This would enable the company to take a final call.

PROBLEM IDENTIFICATION

As per my observation, the following problems have been identified to be significant, as here under :

1. DEMAND UNCERTAINTY: Since the Mexican market has the highest obesity rate, therefore there seems to be an

increase in demand for low-calorie sodas. The main consumers of these segment are the middle to upper class.

The low class, which the BEBIDA SOL is targeting , basically consume the high –sugared carbonated soft drinks. The

company has two assumptions to this :

a) One, that they cannot afford the high priced branded low-calorie soft drinks.

b) Two, that they lack awareness of the product, and therefore, are good with the idea of consuming the

high-sugared soft drinks.

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2. CANNIBALISATION: The company has a regular range of carbonated soft drinks, that consists regular colas

carbonates and non- cola carbonates , such as lemon/lime or carbonates. The revenue from sales has dramatically

risen from 642million pesos to 900million pesos over the last 3 years. The entry of the new product can

significantly cannibalize their own to staggering 800,000 pesos of after-tax cash-flow per year.

3. OPPORTUNITY CASH: Mr. Antonio Ortega has a ready unoccupied annex, for which he recently got an offer of

60,000 pesos per year. The amount would obviously come to him without any further investment. On the other

hand, the new venture would demand heavy capital investment, followed by the market risks.

4. IMPACT ON CASH FLOW: Mr. Pedro, the company’s general manager, proposed offering a longer collection , to let

the grocers pay in 45 days, in place of the normal 30 days. As per him, this will motivate them to carry the new

product and help the company to achieve higher sales revenue. On the other hand, they wish to remain steady

with the company’s normal payment schedule to the sundry creditors. The accounts payable is usually settled in 36

days. This gap of 9 days will put stress on the cash-flow on the company. This proposal, along with the intention of

keeping an inventory of 1month will involve additional working capital, which in turn will involve an interest for the

working capital. All of these will put an impact on the company’s cash-flow.

5. IRRELEVANT COST: Mr. Pedro hired a consultant to do a market study after discussing the case with Mr. Antonio .

The market survey cost the company 5 million pesos which Mr. Pedro had paid shortly, after the completion of the

report. This cost cannot be taken as irrelevant ,as this is not part of the decision making part of the project. In fact,

based on the report, the company will decide whether to move ahead or not. This cost, though a necessity for the

decision process, is a significant cash outflow, even before the project has commenced.

ALTERNATIVE SOLUTIONS TO THE ABOVE PROBLEMS

1. DEMAND UNCERTAINTY - As per the projections given by the consultant, the revenue of 36 million Pesos is

just 4% of the existing revenues of 900 million in the year 2011, which is ever increasing, due to the nature of

the product. There was a need for a improvement of the product as per the needs of the consumer, and an early

start to launch the new Zero Calorie product – line. There was a choice made available to the each type of

consumer – People of low income group – the existing product, and people with income group – both the options

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are available. Even for the health conscious consumers now, we had a product. The demand has been backed

by the consultant’s report, and the uncertainty of the future demand of a new product, is the risk which is

associated with high returns product. Higher the risk, higher the profit.

2. CANNIBALISATION: The 800000 Pesos of potential erosion is 5 % of the existing cash flows which is being

absorbed by the new product as an indirect cost, which is 2% of the new product Turnover. Since the new

product is giving a net margin of 19% without loan, 2% of cannibalisation cost can be absorbed easily.

3. OPPORTUNITY CASH: The Rental Income of 60000 Pesos a year is quite small as compared to the revenues to

be earned from the new project. This will not be very crucial point in the decision making for launching the new

project.

4. IMPACT ON CASH FLOW: Though there is a bit stress on the working Capital, but it is a part of the risk to be

taken. The returns on the capital is quite high to absorb the cost of working capital.

5. IRRELEVANT COST: The Cost of research is done to assist the decision for the new product launch. It does not

play any financial role in assisting the decision making.

THE MAIN PROBLEM IN TAKING THE DECISION FOR THE NEW PRODUCT

There are two options available to Antonio - whether he should go for the loan of 10000000 Pesos of

Bank Loan at 16 %.

Below we have analysed this problem with the help of calculations of profitability, NPV and IRR, whether he should

go ahead with the loan or not.

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HOLA KOLA -THE CAPITAL BUDGETING DECISION WITH LOAN 20% Years

0 1 2 3 4 5

Sales Revenue

Unit Selling price 0 5 5 5 5 5

Annual Sales (In Litres) 600000x 12 ( Volume) 0 7200000 7200000 7200000 7200000 7200000

Total Revenue 0 36000000 100% 36000000 100% 36000000 100% 36000000 100% 36000000 100%

Less: COGS 0

Raw Material cost@ 1.8 Pesos /liter X 600000

x12 0 (12960000) -36% (12960000) -36% (12960000) -36% (12960000) -36% (12960000) -36% Overhead Expenses@1% of Sales 0 (360000) -1% (360000) -1% (360000) -1% (360000) -1% (360000) -1% Direct Labor Cost@1,80,000 peros/month X 12 0 (2160000) -6% (2160000) -6% (2160000) -6% (2160000) -6% (2160000) -6%

Gross Profit 20520000 57% 20520000 57% 20520000 57% 20520000 57% 20520000 57%

Operating Expenses 0

Energy Cost@50,000 peros/month X 12 0 (600000) -2% (600000) -2% (600000) -2% (600000) -2% (600000) -2% Building Rental (Oppourtunity Cost) 0 (60000) (60000) (60000) (60000) (60000)

General Administrative & Selling Expenses 0 (300000) -1% (300000) -1% (300000) -1% (300000) -1% (300000) -1% Less : Interest on TL (1600000) -4% (1280000) -4% (960000) -3% (640000) -2% (320000) -1% Less: depreciation (10000000) -28% (10000000) -28% (10000000) -28% (10000000) -28% (10000000) -28% EBIT 7960000 22% 8280000 23% 8600000 24% 8920000 25% 9240000 26% Less: Tax@30% 0 2388000 7% 2484000 7% 2580000 7% 2676000 7% 2772000 8% PAT 0 5572000 15% 5796000 16% 6020000 17% 6244000 17% 6468000 18% Add:Depriciation 0 10000000 10000000 10000000 10000000 10000000

Total Operating Cash Flow (OCF)

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Less:Erosion 0 (800000) 2% (800000) 2% (800000) 2% (800000) 2% (800000) 2%

Net operating Cash after Erosion 14772000 14996000 15220000 15444000 15668000

Investments

(Machine with Installation Charges) 4,00,00,000- -2000000 -2000000 -2000000 -2000000 -2000000

Resale Value 0 4000000

Receivables=(Sales/365) X Collection Period(45

Days) 0 4438356.16 4438356.16 4438356.16 4438356.16 4438356.16 Inventories (One month raw material Cost) 1080000 1080000 1080000 1080000 1080000 1080000 Payables=(Material cost /365) X Avg. Payment

period(36 days) 0 (1278247) (1278247) (1278247) (1278247) (1278247)

Net change in Working Capital requirement 1080000 4240109.589 4240109.59 4240109.589 4240109.589 8240109.589

Total Cash from CAPEX 3,89,20,000- 22,40,110 22,40,110 22,40,110 22,40,110 62,40,110

FCFF 3,89,20,000- 1,70,12,110 1,72,36,110 1,74,60,110 1,76,84,110 2,19,08,110 NPV@20% 1,46,63,102 .94 NPV@16% 1,99,38,314 .53 IRR 36% Payback period 2.26

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HOLA KOLA -THE CAPITAL BUDGETING DECISION WITHOUT LOAN

Years

0 1 2 3 4 5

Sales Revenue

Unit Selling price 0 5 5 5 5 5

Annual Sales (In Litres) 600000x 12 ( Volume) 0 7200000 7200000 7200000 7200000 7200000

Total Revenue 0 36000000 100% 36000000 36000000 36000000 36000000

Less: COGS 0

Raw Material cost@ 1.8 Pesos /liter X 600000 x12 0

(12960000 ) -36% (1296000 0) (12960000 ) (12960000 ) (1296000 0) Overhead Expenses@1% of Sales 0 (360000) -1% (360000) (360000) (360000) (360000) Direct Labor Cost@1,80,000 peros/month X 12 0 (2160000) -6%

(2160000 ) (2160000) (2160000) (2160000) Gross Profit 2052000 0 57 % 2052000 0 2052000 0 2052000 0 2052000 0 Operating Expenses 0

Energy Cost@50,000 peros/month X 12 0 (600000) -2% (600000) (600000) (600000) (600000) Building Rental (Oppourtunity Cost) 0 (60000) 0% (60000) (60000) (60000) (60000) General Administrative & Selling Expenses 0 (300000) -1% (300000) (300000) (300000) (300000) Less: depreciation (10000000 ) -28% (1000000 0) (10000000 ) (10000000 ) (1000000 0) EBIT 9560000 27% 9560000 9560000 9560000 9560000 Less: Tax@30% 0 2868000 8% 2868000 2868000 2868000 2868000 PAT 0 6692000 19% 6692000 6692000 6692000 6692000 Add:Depriciation 0 10000000 10000000 10000000 10000000 10000000

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Total Operating Cash Flow (OCF)

(Net Cash from Operating Activities) 0 16692000 16692000 16692000 16692000 16692000

Less:Erosion 0 (800000) -2% (800000) (800000) (800000) (800000)

Net operating Cash after Erosion 15892000

1589200

0 15892000 15892000 15892000 Investments

(Machine with Installation Charges) -5,00,00,000 0 0 0 0 0

Resale Value 0 4000000

Receivables=(Sales/365) X Collection Period(45 Days) 0

4438356.1 64 4438356. 16 4438356.1 64 4438356.1 64 4438356.1 64 Inventories (One month raw material Cost) 1080000 1080000 1080000 1080000 1080000 1080000 Payables=(Material cost /365) X Avg. Payment

period(36 days) 0 (1278247) (1278247) (1278247) (1278247) (1278247)

Net change in Working Capital requirement 1080000

4240109.5 89 4240109. 59 4240109.5 89 4240109.5 89 8240109.5 89

Total Cash from CAPEX -4,78,40,000 84,80,219

84,80,21 9 84,80,219 84,80,219 1,64,80,21 9 FCFF -4,78,40,000 2,43,72,219 2,43,72,219 2,43,72,219 2,43,72,219 3,23,72,219 NPV@20% 2,82,62,875.13 NPV@16% 3,57,70,706.70 IRR 44% Payback period 1.96

CONCLUSION

To Conclude, there is no doubt the project is viable as per the calculations and has a positive NPV. In addition there

is a social cause as well, where the company is selling a product which is not increasing the Obesity rate in the

Country.

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The Profitability of the product and the Cash inflow is taking care of all the expense (Cannibalisation Cost,

Opportunity Cost)

Thus Antonio should go ahead with the project without Loan which is helping him to recover the capital cost in

lesser period and in addition the IRR is also higher by 8%.

The Company is also earning higher net profit @ 19% as compared to the existing Product’s net profit of 5.6% in

2011.

Particlars Proposal w/oLoan with LoanProposal Net Profit % after cannibalistion 17% 13% NPV@20% 2,82,62,875.1 3 1,46,63,102.9 4 NPV@16% 3,57,70,706.7 0 1,99,38,314.5 3 IRR 44% 36% Payback period 1.96 2.26

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Flash Memory, Inc.

Exhibit 1 Actual and Forecasted Financial Statements Assuming No Investment in New Product Line, No Sale of New Common Stock, and All Borrowings at 9.25%

Income Statement ($000s except EPS)

Actual Forecast

2007 2008 2009 2010 2011 2012

Sales $77,131 $80,953 $89,250 $1,20,000 $1,44,000 $1,44,000

- YOY growth 5.0% 10.2% 34.5% 20.0% 0.0%

Cost of goods sold $62,519 $68,382 $72,424 $97,320 $1,16,784 $1,16,784

- % of sales 81.1% 84.5% 81.1% 81.1% 81.1% 81.1%

Gross margin $14,612 $12,571 $16,826 $22,680 $27,216 $27,216

Research and development $3,726 $4,133 $4,416 $6,000 $7,200 $7,200

- % of sales 4.8% 5.1% 4.9% 5.0% 5.0% 5.0%

Selling, general and administrative $6,594 $7,536 $7,458 $10,032 $12,038 $12,038

- % of sales 8.5% 9.3% 8.4% 8.4% 8.4% 8.4%

Operating income $4,292 $902 $4,952 $6,648 $7,978 $7,978

Interest expense $480 $652 $735 $937 $1,323 $1,565

- Interest rate % 9.25% 9.25% 9.25%

Other income (expenses) -$39 -$27 -$35 -$50 -$50 -$50

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Income taxes $1,509 $89 $1,673 $2,264 $2,642 $2,545

- % of income before taxes 40.0% 39.9% 40.0%

Net income $2,264 $134 $2,509 $3,396 $3,963 $3,818

Earnings per share $1.52 $0.09 $1.68 $2.28 $2.66 $2.56

Exhibit 1 (continued)

Balance Sheet ($000s except shares outstanding and book value per share)

Actual Forecast 2007 2008 2009 2010 2011 2012 Cash $2,536 $2,218 $2,934 $3,960 $4,752 $4,752 - % of sales 3.3% 2.7% 3.3% 3.3% 3.3% 3.3% Accounts receivable $10,988 $12,864 $14,671 $19,726 $23,671 $23,671 - Days of sales 33 33 37 60 60 60 Inventories $9,592 $11,072 $11,509 $13,865 $16,638 $16,638 - Days of COGS 56 59 58 52 52 52 Prepaid expenses $309 $324 $357 $480 $576 $576 - % of sales 0.3% 0.2% 0.2% 0.4% 0.4% 0.4%

Total current assets $23,425 $26,478 $29,471 $38,031 $45,637 $45,637

Property, plant & equipment at cost $5,306 $6,116 $7,282 $8,182 $9,082 $9,982

Less: Accumulated depreciation $792 $1,174 $1,633 $2,179 $2,793 $3,474

Net property, plant & equipment $4,514 $4,942 $5,649 $6,003 $6,290 $6,508

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Accounts payable $3,084 $4,268 $3,929 $4,799 $5,759 $5,759

- Days purchases 30 38 33 30 30 30

Notes payable $6,620 $8,873 $10,132 $14,306 $16,914 $13,325

Accrued expenses $563 $591 $652 $876 $1,051 $1,051

Income taxes payable $151 $9 $167 $226 $264 $255

- % of taxes 10% 10% 10% 10% 10% 10%

Other current liabilities $478 $502 $554 $744 $893 $893

- % of sales 0.6% 0.6% 0.6% 0.6% 0.6% 0.6%

Total current liabilities $10,896 $14,243 $15,434 $20,951 $24,881 $21,282

Common stock at $0.01 per share par value $15 $15 $15 $15 $15 $15

Paid in capital in excess of par value $7,980 $7,980 $7,980 $7,980 $7,980 $7,980

Retained earnings $9,048 $9,182 $11,691 $15,087 $19,050 $22,868

Total shareholders' equity $17,043 $17,177 $19,686 $23,082 $27,045 $30,863

Total liabilities & shareholders' equity $27,939 $31,420 $35,120 $44,034 $51,926 $52,145

Number of shares outstanding 14,91,662 14,91,662 14,91,662 14,91,662 14,91,662 14,91,662

Book value per share $11.43 $11.52 $13.20 $15.47 $18.13 $20.69

Return on equity 13.3% 0.8% 12.7% 14.7% 14.7% 12.4%

Interest coverage ratio (times) 8.9 1.4 6.7 7.1 6.0 5.1

Notes payable / accounts receivable 60.2% 69.0% 69.1% 72.5% 71.5% 56.3%

Notes payable / shareholders' equity 38.8% 51.7% 51.5% 62.0% 62.5% 43.2%

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Exhibit 2 Calculation of Cost of Capital

Step 1 - Calculation of asset Beta for the industry using market value weights:

Micron Technology

D = book value of debt (4-30-2010) $2,760 25.8% BVE = book value of equity (4-30-2010) $5,603

MVE = market value of equity (4-30-2010) $7,925 74.2%

βE = equity or levered beta 1.25

βA = asset or unlevered beta 1.03

SanDisk Corporation

D = book value of debt (4-30-2010) $975 9.6%

BVE = book value of equity (4-30-2010) $4,157

MVE = market value of equity (4-30-2010) $9,135 90.4%

βA = asset or unlevered beta 1.28

STEC, Inc.

D = book value of debt (4-30-2010) $0 0.0%

BVE = book value of equity (4-30-2010) $276

MVE = market value of equity (4-30-2010) $699 100.0%

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Average βA for the industry 1.10

Exhibit 2 (continued) Calculation of Cost of Capital

Step 2 - Calculation of cost of equity capital for Flash Memory, Inc.: Current weights of debt and equity

D = value of bank debt from 2009 balance sheet $10,132 21.4% E = value of equity at $25 per share $37,292 78.6% Since Flash is at the limit of its current loan agreement, management believes this is a higher proportion of debt finance than optimal. As stated in the case, management has set target capital structure weights equal to 18% debt and 82% equity.

Flash Memory, Inc.

D = target value of debt 18.0%

E = target value of equity 82.0%

βA = average asset beta for the industry 1.10

Cost of equity capital for Flash

Ke = Rf + βE x Market Risk Premium

Rf = risk-free rate of return 3.70%

βE = Flash's equity or levered beta 1.25

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Ke = Flash's cost of equity capital 11.20%

Step 3 - Calculation of cost of capital for Flash Memory, Inc.: K = Wd x Kd x (1 - T) + We x Ke

Wd = weight of debt in Flash's capital structure 18.00%

Kd = Flash's cost of debt capital (a) 7.25%

T = Flash's income tax rate 40.00%

We = weight of equity in Flash's capital structure 82.00%

Ke = Flash' cost of equity capital 11.20%

K = Flash's cost of capital 9.96%

(a) at 18% weight of debt Flash will be within the 70% of accounts receivable limit of the existing loan agreement, thus the 7.25% cost of debt capital. If Flash was over this limit and changed to factoring, the cost of debt capital would increase to 9.25%, and the equity beta and cost of equity capital would also increase.

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Exhibit 3 Net Present Value of Investment in New Product Line ($000s)

2010 2011 2012 2013 2014 2015 Total

Investment in equipment -$2,200

Net working capital required to support sales $5,648 $7,322 $7,322 $2,877 $1,308 $0

- % of sales 26.15% 26.15% 26.15% 26.15% 26.15% 26.15%

Investment in net working capital (the year-on-year change) -$5,648 -$1,674 $0 $4,446 $1,569 $1,308 $0

Sales $21,600 $28,000 $28,000 $11,000 $5,000

Cost of goods sold (includes equipment depreciation) $17,064 $22,120 $22,120 $8,690 $3,950

- % of sales 79.00% 79.00% 79.00% 79.00% 79.00%

Research & development $0 $0 $0 $0 $0

Selling, general & administrative $1,806 $2,341 $2,341 $920 $418

- % of slaes 8.36% 8.36% 8.36% 8.36% 8.36%

Launch promotion $300 $0 $0 $0 $0

Income before income taxes $2,430 $3,539 $3,539 $1,390 $632

Income taxes @ 40% $972 $1,416 $1,416 $556 $253

Net income $1,458 $2,124 $2,124 $834 $379

Depreciation of equipment @ 20% SLM $440 $440 $440 $440 $440 $2,200

Cash flow from operations $1,898 $2,564 $2,564 $1,274 $819

Total cash flow -$7,848 $225 $2,564 $7,009 $2,843 $2,127

NPV @ cost of capital $3,014

IRR 21.9%

MIRR 17.3%

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Flash Memory, Inc.

Exhibit 4 Change in Forecasted Financial

Statements due to Acceptance of Investment in New Product Line Financial Statement Account ($000s) Actual Forecast 200 7 200 8 200 9 2010 2011 2012 Sales $21,6 00 $28,000 Cost of goods sold (includes equipment depreciation) $17,0 64 $22,120 Research and development $0 $0 Selling, general and administrative (includes launch) $2,10 6 $2,341 Increase in operating income $2,43 0 $3,539 Cash (3.3% of sales) $713 $924 Accounts receivable (60 DSO) $3,55 1 $4,603

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Inventories (52 days of COGS) $2,43 1 $3,151 Prepaid expenses (0.4% of sales) $86 $112 Net property, plant & equipment

$2,20 0 $1,76 0 $1,320 Accounts payable (60 days of purchases) $842 $1,091 Accrued expenses (0.73% of sales) $158 $204 Other current liabilities (0.62% of sales) $134 $174 For informational purposes only: NWC % of sales 26.15 % 26.15%

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Exhibit 5 (continued)

Balance Sheet ($000s except shares outstanding and book value per share)

Actual Forecast 2007 2008 2009 2010 2011 2012 Cash $2,536 $2,218 $2,934 $3,960 $5,465 $5,676 Accounts receivable $10,988 $12,864 $14,671 $19,726 $27,222 $28,274 Inventories $9,592 $11,072 $11,509 $13,865 $19,069 $19,789 Prepaid expenses $309 $324 $357 $480 $662 $688

Total assets $27,939 $31,420 $35,120 $46,234 $60,467 $62,255

Notes payable $6,620 $8,873 $10,132 $16,506 $22,897 $18,719

Other current liabilities $478 $502 $554 $744 $1,027 $1,066

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Total liabilities & shareholders' equity $27,939 $31,420 $35,120 $46,234 $60,467 $62,255

Return on equity 13.3% 0.8% 12.7% 14.7% 18.7% 16.5%

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Exhibit 6 Actual and Forecasted Financial Statements Assuming Acceptance of Investment in New Product Line, Sale of 300,000 Shares of Common Stock Receiving Net Proceeds of $23 per share, and All Borrowings at 7.25% Income Statement ($000s except earnings per share)

Actual Forecast

2007 2008 2009 2010 2011 2012

Sales $77,131 $80,953 $89,250 $1,20,000 $1,65,600 $1,72,000

Cost of goods sold $62,519 $68,382 $72,424 $97,320 $1,33,848 $1,38,904

Gross margin $14,612 $12,571 $16,826 $22,680 $31,752 $33,096

Research and development $3,726 $4,133 $4,416 $6,000 $7,200 $7,200

Selling, general and administrative $6,594 $7,536 $7,458 $10,032 $14,144 $14,379

Operating income $4,292 $902 $4,952 $6,648 $10,408 $11,517

Interest expense $480 $652 $735 $735 $687 $1,112

Other income (expenses) -$39 -$27 -$35 -$50 -$50 -$50

Income before income taxes $3,773 $223 $4,182 $5,863 $9,671 $10,355

Income taxes $1,509 $89 $1,673 $2,345 $3,868 $4,142

Net income $2,264 $134 $2,509 $3,518 $5,802 $6,213

Earnings per share $1.52 $0.09 $1.68 $1.96 $3.24 $3.47

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Balance Sheet ($000s except shares outstanding and book value per share) Actual Forecast 2007 2008 2009 2010 2011 2012 Cash $2,536 $2,218 $2,934 $3,960 $5,465 $5,676 Accounts receivable $10,988 $12,864 $14,671 $19,726 $27,222 $28,274 Inventories $9,592 $11,072 $11,509 $13,865 $19,069 $19,789 Prepaid expenses $309 $324 $357 $480 $662 $688

Total assets $27,939 $31,420 $35,120 $46,234 $60,467 $62,255

Notes payable $6,620 $8,873 $10,132 $9,476 $15,338 $10,550

Other current liabilities $478 $502 $554 $744 $1,027 $1,066

Total shareholders' equity $17,043 $17,177 $19,686 $30,104 $35,907 $42,119

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Return on equity 13.3% 0.8% 12.7% 11.7% 16.2% 14.8%

Total liabilities / shareholders' equity 63.9% 82.9% 78.4% 53.6% 68.4% 47.8%

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Exhibit 7 Summary Statistics

No Investment in New Product Line Sell No New Stock

Borrow at 9.25%

2010 2011 2012

Earnings per share $2.28 $2.66 $2.56

Interest coverage ratio (times) 7.1 6.0 5.1

Return on equity 14.7% 14.7% 12.4%

Notes payable / accounts

receivable 72.5% 71.5% 56.3%

Notes payable / shareholders'

equity 62.0% 62.5% 43.2%

Total liabilities / shareholders'

equity 90.8% 92.0% 69.0%

Notes payable (000s) $14,306 $16,914 $13,325

Invest in the New Product Line

2010 2011 2012

receivable 83.7% 84.1% 66.2%

equity 71.5% 80.7% 55.1%

equity 100.3% 113.1% 83.2%

Notes payable (000s) $16,506 $22,897 $18,719

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Line

2010 2011 2012

receivable 48.0% 56.3% 37.3%

equity 31.5% 42.7% 25.0%

equity 53.6% 68.4% 47.8%