May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.Financial Planning and Forecasting Forecasting Sales Projecting the Assets and
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Financial Planning and Forecasting
Forecasting Sales Projecting the Assets and Internally
Generated Funds Projecting Outside Funds Needed Deciding How to Raise Funds
Chapter 17
17-1
Trang 2Preliminary Financial Forecast:
Balance Sheets (Assets)
2012 2013E
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2012 2013E
Preliminary Financial Forecast: Balance Sheets
(Liabilities and Equity)
17-3
Trang 4Preliminary Financial Forecast:
Income Statements
2012 2013E Sales $2,000.0 $2,500.0 Variable costs 1,200.0 1,500.0 Fixed costs 700.0 875.0 EBIT $ 100.0 $ 125.0 Interest 16.0 16.0 EBT $ 84.0 $ 109.0 Taxes (40%) 33.6 43.6 Net income $ 50.4 $ 65.4 Dividends (30% of NI) $15.12 $19.62 Addition to retained earnings $35.28 $45.78
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Key Financial Ratios
2012 2013E Ind Avg Comment Basic earning power
10.00% 10.00% 20.00% Poor Profit margin
2.52% 2.62% 4.00% Poor Return on equity
7.20% 8.77% 15.60% Poor Days sales outstanding 43.8 days 43.8 days 32.0 days Poor
Inventory turnover 8.33x 8.33x
11.00x Poor Fixed assets turnover 4.00x 4.00x 5.00x Poor
Total assets turnover 2.00x 2.00x 2.50x Poor
Debt/Assets
30.00% 40.40% 36.00% OK Times interest earned 6.25x 7.81x 9.40x Poor
Current ratio 2.50x 1.99x 3.00x Poor
Payout ratio
30.00% 30.00% 30.00% OK
17-5
Trang 6Key Assumptions in Preliminary Financial Forecast for
NWC
• Operating at full capacity in 2012.
• Each type of asset grows proportionally with sales.
• Payables and accruals grow proportionally with
sales.
• 2012 profit margin (2.52%) and payout (30%) will
be maintained.
• Sales are expected to increase by $500 million
(%∆S = 25%)
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Determining Additional Funds Needed Using the AFN
Equation
AFN = (A 0 */S 0 )∆S – (L 0 */S 0 )∆S – M(S 1 )(1 – Payout)
= ($1,000/$2,000)($500) – ($100/$2,000)($500) – 0.0252($2,500)(0.7)
= $180.9 million
17-7
Trang 8Management’s Review of the Financial Forecast
• Consultation with some key managers has yielded
the following revisions:
– Firm expects customers to pay quicker next year, thus reducing DSO to 34 days without affecting sales.
– A new facility will boost the firm’s net fixed assets to
$700 million.
– New inventory system to increase the firm’s inventory turnover to 10x, without affecting sales.
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Management’s Review of the Financial Forecast
• These changes will lead to adjustments in the firm’s
assets and will have no effect on the firm’s liabilities and equity section of the balance sheet or its income statement.
17-9
Trang 10Revised (Final) Financial Forecast:
Balance Sheets (Assets)
2012 2013F
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Key Financial Ratios: Final Forecast
2012 2013F Ind Avg Comment Basic earning power 10.00% 10.00% 20.00% Poor
Profit margin 2.52% 2.62% 4.00% Poor
Return on equity 7.20% 8.77% 15.60% Poor
Days sales outstanding 43.8 days 34.0 days 32.0 days OK
Inventory turnover 8.33x 10.00x 11.00x OK
Fixed assets turnover 4.00x 3.57x 5.00x Poor
Total assets turnover 2.00x 2.00x 2.50x OK
Debt/Assets 30.00% 40.40% 36.00% Poor
Times interest earned 6.25x 7.81x 9.40x Poor
Current ratio 2.50x 1.98x 3.00x Poor
Payout ratio 30.00% 30.00% 30.00% OK
17-11
Trang 12What was the net investment in capital?
125 ,
1
$
625
$ 125
$ 625
$
625
$ ) 190
$ 315 ($
625
$
NetFA NOWC
=
+
−
=
+
−
−
=
+
=
900
$
225
$
900
$ 125 ,
1
$ capital in
investment
Net
=
−
=
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How much free cash flow is expected to be
generated in 2013?
FCF = EBIT(1 – T) – Net investment in capital
= $125(0.6) – $225
= $75 – $225
= -$150
17-13
Trang 14Suppose Fixed Assets Had Been Operating at
Only 85% of Capacity in 2012
• The maximum amount of sales that can be
supported by the 2012 level of assets is:
$2,353 5
$2,000/0.8
capacity
of
% sales/
Actual sales
Capacity
=
=
=
• 2013 forecast sales exceed the capacity sales, so
new fixed assets are required to support 2013 sales.
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How can excess capacity affect the forecasted ratios?
• Sales wouldn’t change but assets would be lower,
so turnovers would improve.
• Less new debt, hence lower interest and higher
profits
• EPS, ROE, debt ratio, and TIE would improve.
17-15
Trang 16How would the following items affect the AFN?
• Higher dividend payout ratio?
– Increase AFN: Less retained earnings.
• Higher profit margin?
– Decrease AFN: Higher profits, more retained earnings.
• Higher capital intensity ratio?
– Increase AFN: Need more assets for a given level of sales.
• Pay suppliers in 60 days, rather than 30 days?
– Decrease AFN: Trade creditors supply more capital (i.e., L 0 */S 0 increases).