Case Scenario:
As your first week at Henley Manufacturing Inc. draws to a close, you find a memorandum on your desk from the company’s CEO. The memo outlines sales and earnings goals for next year: sales are expected to increase 15% with net income growing by 20%. The memo says that these goals are ambitious in light of the company’s performance over the past years- ambitious, but attainable if “everyone remains focused and committed to our business strategy.” As you finish the memo, your boss, the vice president of finance, steps into your office. She asks you what you think about the memo. You reply that it is important to have clear financial goals but that you would need to know more before making any comments on whether the goals will be or difficult to achieve. As she leaves your office, you ask if the CEO will be announcing these goals at next week’s annual shareholders’ meeting. Your boss answers, “We aren’t required to under U.S. securities regulations.” Two days later, your boss stops by again and tells you that she raised the issue of disclosing to shareholders the firm’s net income and sales goals at this morning’s executive committee meeting. The CEO was intrigued but requested that someone identify the costs and benefits of doing so. As she leaves your office, your boss asks you to prepare a briefing document for presentation at the next executive committee meeting.
Write a memo to the CEO containing the information requested for required a & B.
Required A:
Q1. What are the potential costs and benefits to Henley Manufacturing of announcing its sales and earnings goals at the shareholders’ meeting?
Q2. Would you recommend that the CEO announce both, one, or neither goal? Why?
Q3. If the company’s sales and earnings goals covered three years rather than just next year, would your recommendation change? Why or why not?
Required B:
Suppose the memo was more detailed and described the following financial goals for next year: annual sales growth of 15%; annual earnings growth of 20%; a return on net tangible assets of 16%; a return on common equity of 20%; A MINIMM CURRENT RATIO OF 2.4; a minimum interest coverage ratio of 7.0; a minimum profit margin of 5%; a divided payout ratio (dividends/net income) of 35% to 40%; a maximum long-term debt to common equity ratio of 40% to 45%; a minimum increase of 15% in annual capital expenditures; and a minimum inventory turnover ratio of 4.5. Would you recommend that the CEO disclose all, some, or none of these goals at the shareholders’ meeting? Which one and why?