Step 6

Strategy Implementation
a. EPS/EBIT Analysis of Hersheys Food Corporation
Earnings Per Share (EPS)
It is considered to be the most important variable in determining a share's price. It is also a
major component used to calculate the price-to-earnings valuation ratio. The portion of a
company's profit allocated to each outstanding share of common stock. Earnings per share
serve as an indicator of a company's profitability. The number of shares outstanding can
change over time so it is better to use weighted average number of shares outstanding to
calculate it. Earnings Per Share is calculated by the following formula:




Earnings Before Interest and Tax (EBIT)
EBIT is to indicate profitability of a company. It was calculated as revenue minus expenses,
excluding tax and interest. In other meanings, EBIT is all profits before including interest
payments and income taxes. By excluding taxes and interest expenses, it makes an easier
cross-company comparison. EBIT is also referred as operating earning, operating profit
and operating income, as EBIT can be calculated as follows:
EBIT = Revenue Operating Expenses
The Hershey Company needs to raise $ 1 million to finance implementation of a market
development strategy. The company currently has outstanding of 100,000 shares and it is
selling for $ 50 per share. The interest rate is 10 percent and a tax rate of 50 percent. The
company expected to has earnings before interest and taxes of $ 2 million if a recession
occurs in next year, $ 4 million if economy stays normal, and $ 8 million if the economy
significantly improves. EPS/EBIT analysis can be used to determine if all stock, all debt or
combination of stock and debt is the best capital financing alternative. In Table 6.1, the EPS
values of 9.5, 18.50, and 39.50 is the best financing alternative for Hershey Company if a
recession, normal, or boom year is expected. An EPS/EBIT chart can be constructed to
determine the break-even point, where one financing alternative becomes more attractive
than another.
Table 6.1 EPS/EBIT Analysis for the Hershey Company (In Millions)
Common Stock Financing Debt Financing Combination Financing
Recession Normal Boom Recession Normal Boom Recession Normal Boom
EBIT $2.0 $4.0 $8.0 $2.0 $4.0 $8.0 $2.0 $4.0 $8.0
Interest 0 0 0 0.10 0.10 0.10 0.05 0.05 0.05
EBT 2.0 4.0 8.0 1.9 3.9 7.9 2.0 4.0 8.0
Taxes 1.0 2.0 4.0 0.95 1.95 3.95 0.975 1.975 3.975
EAT 1.0 2.0 4.0 0.95 1.95 3.95 0.975 1.975 3.975
#
Shares 0.12 0.12 0.12 0.10 0.10 0.10 0.11 0.11 0.11
EPS 8.33 16.66 33.33 9.50 19.50 39.50 8.86 17.95 36.14

Figure 6.1 EPS/EBIT

EPS/EBIT analysis is a valuable tool for making the capital financing decisions for
implementing strategies, but there are several considerations to be made whenever using
this technique. First, when EPS levels are lower, the profit levels may be higher for stock or
debt alternatives. Another consideration when using EPS/EBIT analysis is flexibility. An
0
4
8
12
16
20
24
28
32
36
40
2.0 4.0 8.0
E
P
S

EBIT
DF CF CSF
organizations flexibility does for considering future needs when the organizations capital
structure changes. Using all debt or all stock to raise capital in the present may impose fixed
obligations, restrictive covenants, or other constraints that could severely reduce a firms
ability to raise additional capital in the future. Control is also one of the considerations.
When additional stock is issued to finance strategy implementation, ownership and control
of the enterprise are diluted. This can be serious concern in todays business environment of
hostile takeovers, mergers and acquisitions. Dilution of ownership can be overriding concern
in closely held corporations in which stock issuances affect the decision-making power of
majority shareholders. When using EPS/EBIT analysis, timing in relation to movements of
stock prices, interest rates and bond prices becomes important. In times of depressed stock
prices, debt may prove to be the most suitable alternative from both a cost and a demand
standpoint. However, when interest rate (cost of capital) is high, stock issuances become
more attractive.
b. Projected Income Statement
Eating too much chocolate and candy will harm our health. Besides that, there are many
other factors that will negatively affect our health. This message has brought some
awareness to the people nowadays. So, Hershey has to invest in some research and
development that related to healthy products in order to increase their market share as
organic food has become one of the fastest growing sectors. If Hershey continues to market
the existing products and develop new products that address the healthy to the public, then
their profits will increase throughout the years. Therefore, the following is the Hersheys
projected income statements respectively for 2007, 2008 and 2009
Table 6.2 Hersheys Projected Income Statement (In Thousands of dollars)
2009 2008 2007
Net Sales
5,298,668.00 5,132,768.00 4,946,716.00
Cost and Expenses

Cost of Sales
3,245,531.00 3,375,050.00 3,315,147.00
Selling, marketing and
administrative
1,208,672.00 1,073,019.00 895,874.00
Business realignment and
impairment charges, net
82,875.00 94,801.00 276,868.00
Total costs and expenses 4,537,078.00 4,542,870.00 4,487,889.00
Income before Interest and
Income Taxes
761,590.00 589,898.00 458,827.00
Interest expense, net
90,459.00 97,876.00 118,585.00
Income before Income Taxes
671,131.00 492,022.00 340,242.00
Provision for Income Taxes
235,137.00 180,617.00 126,088.00
Net Income
435,994.00 311,405.00 214,154.00

c. Projected Balance Sheet
The projected balance sheets is scheduled for expected assets (total assets, fixed assets
and current assets), liabilities (long term liabilities, current liabilities, total liabilities) and
stockholders equity which begin with retained earnings and then forecasting shareholders
equity. Before an appropriate adjustment is made, Hershey should use the cash account as
the plug figure, use the cash account to make assets total the liabilities and net worth. For
example, if the plug figure is too high in cash account then Hershey could reduce this
number and simultaneously reduce a liability and equity account the same amount to keep
the statement in balance.
Table 6.3 Hersheys Projected Balance Sheet (In Thousands of dollars)
2009 2008 2007
Assets
Current Assets:
Cash and Cash Equivalents 253,605 37,103 129,198
Short-Term Investments - - -
Net Receivables 450,258 526,056 570,953
Inventory 519,712 592,530 600,185
Other Current Assets 161,859 189,256 126,238
Total Current Assets 1,385,434 1,344,945 1,426,574
Long Term Investments - - -
Property Plant and Equipment 1,404,767 1,458,949 1,539,715
Goodwill 571,580 554,677 584,713
Intangible Assets 125,520 110,772 155,862
Accumulated Amortization - - -
Other Assets 183,377 151,561 540,249
Deferred Long Term Charges 4,353 13,815 -
Total Assets 3,675,031 3,634,719 4,247,113
Liabilities
Current Liabilities:
Accounts Payable 871,315 768,708 574,773
Short/Current Long Term Debt 39,313 501,504 856,392
Other Current Liabilities - - 187,605
Total Current Liabilities 910,628 1,270,212 1,618,770
Long Term Debt 1,502,730 1,505,945 1,279,965
Other Liabilities 501,334 504,963 544,016
Deferred Long Term Liability Charges - 3,646 180,842
Minority Interest 39,880 31,745 30,598
Negative Goodwill - - -
Total Liabilities 2,954,572 3,316,520 3,654,191
Stockholders' Equity
Misc. Stocks, Options, Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock 359,901 359,901 359,901
Retained Earnings 4,148,353 3,975,762 3,927,306
Treasury Stock

(3,979,629)

(4,009,931)

(4,001,562)
Capital Surplus 394,678 352,375 335,256
Other Stockholder's Equity

(202,844)

(359,908)

(27,979)
Total Stockholder's Equity 720,459 318,199 592,922
Total Liabilities and SE 3,675,031 3,634,719 4,247,113

The results above are all depends on Hershey sales forecast. We estimate the future level of
sales and calculate Hershey expected level of EBIT for this sales level.
If the projected sales level is closely to the indifference point, then the decision could not
make based on the basis of EPS. There are some factors that will increase in importance and
would tend to weigh these causes closely in making the debt versus equity decision.
Preferred stock is only encouraged to use for financing if there is compelling reason. Those
reasons included of avoiding limiting debt covenants, using up all the debt capacity and
many others. However, from a quantitative standpoint, preferred stock is always lower than
the EPS under debt financing.
d. Projected Financial Ratio
The projected financial ratio for Hershey will be provided giving by liquidity ratio, profitability
ratio, debt ratio and efficiency ratio. The several ratios to show the benefits of Hersheys
strategic plan is
1) Liquidity Measurement Ratios
Liquidity ratio measure of how easy it will be for the company to raise enough cash or
convert assets into cash
i. Current Ratio =



=

Results: Current ratio is to determine the liquidity of a company and easily to pay off the
current liabilities. The result shows that in 2009, Hersheys current ratio is 1.52
which is better than 2008 where the current ratio is 1.06.

ii. Quick Ratio =



=

Results: Quick ratio is to calculate the ability of company pay off its current liabilities with
quick assets. The company do not need to sell off long-term or capital asset if
they meet the obligations. Although the quick ratio improves from 0.44 to 0.77,
the ratio of 1 is desired in order to show the ability to pay of all current debts with
current assets.
iii. Times Interest Earned =



=

times
Results: This ratio shows the ability of company pay the interest with its before income tax.
The larger ratio is better off compare to lower ratio. From the result, it means that
Hersheys income is 8 times greater than his annual interest expense compare to
last year, 2008, which is only 6 times.
Therefore, the measurements of liquidity show the improvements for Hershey between 2008
and 2009. This is because the company has the ability to generate a greater amount of
operational cash flows between these 2 years.

2) Profitability Indicator Ratios
Profitability ratios compare income statement accounts and categories to show a company's
ability to generate profits from its operations
i. Profit Margin =



=

Results: Profit margin indicates how much profits the company produced at a certain level
of sales. Hershey converts 8.22% of sales into profits in 2009 which is better than
prior year which only has 6.07%.

ii. Return on Assets =



=

Results: Return on assets show the efficiency of a company convert the money used to buy
assets into profits and normally it is used to compare companies in the same
industry. The improvement of ROA from $0.08 in 2008 to $0.12 in 2009 showed
that Hershey became more efficient over the 2009 fiscal year.
The improvements were noted between 2008 and 2009 for Hersheys profit margin and
return on assets was increased proportionally.

3) Debt Ratios
Debt ratio shows a company's ability to pay off its liabilities with its assets
i. Debt Ratio =



=

Results: In debt ratio, a lower ratio is more favourable as lower ratio will imply a more
stable business with the potential longevity and has lower overall debt. In 2008,
the risk level in Hershey is higher as the debt ratio for Hershey is 0.91 which is
higher than 2009, 0.80.
ii. Debt-Equity Ratio =



=

= 4.10
Results: A lower debt-equity ratio is more financially stable business. A higher debt to
equity ratio is risky as the investors havent funded the operations as much as
creditors have. Hersheys debt-equity ratio decreased from 10.42 in 2008 to 4.10
in 2009 which showed a good sign to the company.
Improvements are seen in debt and debt to equity ratio. Hershey is able to pay off the
liabilities with assets.

4) Efficiency Ratios
Efficiency ratios are used by management to help improve the company and how well the
companies utilize their assets to generate income. Besides that, it also helps outside
investors and creditors looking at the operations of profitability of the company
i. Inventory Turnover Ratio =



=



Results: This ratio is to measure whether Hershey Company can control its merchandise,
so it is important to have high return. A high ratio indicates efficiency and a high
rate of sales. The result of Hersheys inventory turnover has slightly improved
from 5.66 in 2008 to 5.84 in 2009.
ii. Accounts Receivable Turnover Ratio =



=



Results: Higher ratio in accounts receivable turnover indicates that the company are
collecting their receivables more frequently throughout a year. The result of
Hersheys account receivable turnover showed that there is an improvement from
9.36 in 2008 to 10.85 in 2009.
iii. Days Sales in Inventory =

days
Results: Calculating of days sales in inventory is to make sure the inventory moves as fast
as possible to minimize the costs and to increase the cash flows. So, a lower ratio
is favorable as it shows the companys cash can be used for other operations.
From the result, it shows that there is an improvement from 64 days in 2008 to 58
days in 2009.
From the projected financial ratio analysis, we can see that Hershey achieved many
improvements in many areas. Their overall liquidity, profitability, debt and efficiency
improved and this can be attributed to their capability to generate a greater amount on
other area such as operational cash flows. In conclusion, Hersheys financial ratio analysis
shows that they are in a good position which able to pay off their debts and allocate their
stockholders profit.

Step 7
Strategy Evaluation
Balance Scorecard of Hershey Company
The balanced scorecard is a strategy-evaluation planning and management system that is
used extensively in business and industry, government, and nonprofit organizations
worldwide in four perspectives: financial performance, customer knowledge, internal
business processes, and learning and growth. Data collection is the key component in
providing specific quantitative results, which are interpreted by managers and executives
and used to make better long-term decisions.
i. The Learning and Growth Perspective
This perspective includes corporate cultural attitudes related to both individual and
corporate self-improvement and also employee training. People are the main resource in a
knowledge-worker organization. It has become a necessary for knowledge workers to be in
a continuous learning mode in this rapidly changes in technology. Metrics are used to guide
managers in focusing training funds where they can help the most. In any case, learning
and growth constitute the essential foundation for success of any knowledge-worker
organization. Kaplan and Norton emphasize that 'learning' is more than 'training' and it also
includes things like tutors and mentors within the organization. Communication among
workers that allows them to readily get help on a problem when it is needed is also
important. This perspective also includes technological tools, which called high performance
work systems.
ii. The Business Process Perspective
This perspective refers to internal business processes. The managers get to know how well
their business is running and whether its products and services conform to customer
requirements through this metrics. These metrics have to be carefully designed by those
who know these processes most intimately. It is not able to be developed by outside
consultants because of the unique missions of this perspective.
iii. The Customer Perspective
Recently, management philosophy has shown an increasing awareness of the importance of
customer focus and customer satisfaction in any kind of business. These have become
leading indicators. If customers are not satisfied, they will eventually find other suppliers
that will meet their demands and needs. Even though the current financial of a business
may look good if there is a poor performance from this perspective but it is a leading
indicator of future decline. In developing these metrics for satisfaction, customers should be
analyzed in terms of kinds of customers. Besides, the kinds of products and services that
provided by the businesses to those customer groups also are being concerned.

iv. The Financial Perspective
Managers will always do whatever necessary to provide accurate and timing funding data for
this perspective. In fact, often there is more than enough control and processing of financial
data. With the implementation of a corporate database, it is hoped that more of the
processing can be centralized and automated. But the current emphasis on financials leads
to the "unbalanced" situation with regard to other perspectives. Therefore, it is perhaps a
need to include additional financial-related data, such as risk assessment and cost-benefit
data in this category.
Table 7.1 Balance Scorecard of Company January 2009
Area of Objectives Measure or Target Time
Expectation
Primary Responsibility
Customers
1. Delight the
Target
Customer
-Consumer feedback
-Dealer profit
growth
-Dealer survey
Next week -give the best serve (fast ,
friendly, clean)
2. Improve Dealer
Profitability
3 months
later
-give bonus for dealer, for
example, if dealer can sale
the product out of the
expectation then the dealer
can get bonus from
company such as free
holiday, etc.
Internal
1. Operational
Excellence
-Improve
hardware
performance
-Improve
inventory
management
-On time
-share of target
segment
-inventory levels
-quality index
-dealer quality rating
Next month -find new technology which
that is useful to company,
for example, more efficient
and more effective
technology
2. Increase
Customer
Profitability
-Understand
customer
segments
-Best-in-class
franchise
teams
6 months
later
-make a new program for
customers
-make an interest offer for
customer
-give new facility, for
example, drive-thru
3. Build the
Franchise
Next year -do survey, search location
which can give good impact
for company such as
strategic location that is
near to city.
Learning and
Growth

1. Organization
Alignment
-employee survey
-strategic job
coverage ratio
Next week -do a specification such as
job specification, etc.
2. Core
Competencies
and Skills
3 weeks later -do a research, look on the
work of employees
3. Access to
Strategic
Information
4 weeks later -change the structure
organization so employees
and employers can
communicate better than
before
Financial
1. Lowest cost -cash flow
-volume growth rate
Cash expense
Next month -cut down other expenses
which is not necessary and
not giving huge influence to
the company
2. Profitable
Growth
2 months
later
-innovation
-make new strategy, for
example, company give
discounts to customers
during Valentine Day event


References
Kaplan, R. S., & Norton, D. P. (1996). Using the balanced scorecard as a strategic
management system. Harvard business review, 74(1), 75-85.