MANAGEMENT CONSULTANCY - Solutions Manual

14-1
CHAPTER 14

FINANCIAL FORECASTING


I. Questions

1. The pro-forma financial statements and cash budget enable the firm to
determine its future level of asset needs and the associated financing that
will be required. Furthermore, one can track actual events against the
projections. Bankers and other lenders also use these financial
statements as a guide in credit decisions.

2. The collections and purchase schedules measure the speed at which
receivables are collected and purchases are paid. To the extent
collections do not cover purchasing costs and other financial
requirements, the firm must look to borrowing to cover the deficit.

3. Rapid growth in sales and profits is often associated with rapid growth in
asset commitment. A P100,000 increase in sales may occasion a
P50,000 increase in assets, with perhaps only P10,000 of the new
financing coming from profits. It is very seldom that incremental profits
from sales expansion can meet new financing needs.

4. The percent-of-sales forecast is only as goods as the functional
relationship of assets and liabilities to sales. To the extent that past
relationships accurately depict the future, the percent-of-sales method
will give values that reasonably represent the values derived through the
pro-forma statements and the cash budget.

II. Multiple Choice

1. C 6. B 11. D 16. B
2. A 7. A 12. C 17. A
3. C 8. C 13. B 18. A
4. A 9. B 14. C 19. D
5. A 10. A 15. A


III. Problems
Chapter 14 Financial Forecasting
14-2

PROBLEM 1 (ETC ELECTRONICS COMPANY)

Cash Receipts Schedule
April May June July Aug. Sept.
Sales P320,000 P300,000 P275,000 P275,000 P290,000 P330,000
+ Cash Sales (10%) 32,000 30,000 27,500 27,500 29,000 33,000
Credit Sales
(90%)
288,000 270,000 247,500 247,500 261,000 297,000
+ Collections
(month after sale)
20%
57,600 54,000 49,500

49,500

52,200
+ Collections
(second month
after sale) 80% 230,400 216,000


198,000


198,000
Total Cash
Receipts P311,900 P293,000

P276,500

P238,200

Cash Payments Schedule
April May June July Aug. Sept.
Purchases P130,000 P120,000 P120,000 P180,000 P200,000 P170,000
Payments (month after
purchase - 40%) 52,000 48,000 48,000

72,000

80,000
Payments (second
month after purchase -
60%) 78,000 72,000


72,000


108,000
Labor Expense (10% of
sales) 27,500 27,500

29,000

33,000
Overhead 12,000 12,000 12,000 12,000
Interest Payments 30,000 30,000
Cash Dividend 50,000
Taxes 25,000 25,000
Capital Outlay 300,000
Total Cash Payments P270,500 P159,500 P185,000 P588,000

Cash Budget
June July August September
Cash Receipts...................................... P311,900 P293,000 P276,500 P283,200
Cash Payments.................................... 270,500 159,500 185,000 588,000
Net Cash Flow...................................... 41,400 133,500 91,500 (304,800)
Beginning Cash Balance...................... 20,000 50,000 50,000 50,000
Cumulative Cash Balance.................... 61,400 183,500 141,500 (254,800)
Monthly Borrowing or (Repayment)...... -- -- -- *28,400
Cumulative Loan Balance .................... -- -- -- 28,400
Marketable Securities Purchased ........ 11,400 133,500 91,500
(Sold) -- -- (236,400)
Cumulative Marketable Securities........ 11,400 144,900 236,400
Ending Cash Balance........................... 50,000 50,000 50,000 10,000

Financial Forecasting Chapter 14
14-3
* Cumulative Marketable Sec. (Aug.) P236,400
Cumulative Cash Balance (Sept.) - 254,800
Required (ending) Cash Balance - 10,000
Monthly Borrowing - P28,400


PROBLEM 2 (ODETTE ELECTRONICS)


Required New Funds = (S) (S) PS
2
(1 D)

S = (10%) (P100 mil.)

S = P10,000,000


RNF (millions) = (P10,000,000) (P10,000,000) .07

(P110,000,000) (1 .40)

= .85(P10,000,000) .25(P10,000,000) .07(P110,000,000) (.60)

= P8,500,000 P2,500,000 P4,620,000

RNF = P1,380,000


PROBLEM 3 (TESS SHOPS, INC.)


a) Required New Funds = (S) (S) PS
2
(1 D)

S = 15% x P300,000,000 = P45,000,000

RNF = (P45,000,000) (P45,000,000) .08

(P345,000,000) (1 .25)


= .80(P45,000,000) .40(P45,000,000) .08
(P345,000,000) (.75)
A
S
A
S
L
S
L
S
85
100
240
300
25
100
120
300
Chapter 14 Financial Forecasting
14-4

= P36,000,000 P18,000,000 P20,700,000

RNF = (P2,700,000)


A negative figure for required new funds indicates that an excess of
funds (P2.7 mil.) is available for new investment. No external funds are
needed.


b) RNF = P36,000,000 P18,000,000 .095(P345,000,000)
x (1 .5)

= P36,000,000 P18,000,000 P16,387,500

= P1,612,500 external funds required

The net profit margin increased slightly, from 8% to 9.5%, which
decreases the need for external funding. The dividend payout ratio
increased tremendously, however, from 25% to 50%, necessitating more
external financing. The effect of the dividend policy change
overpowered the effect of the net profit margin change.