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Financial Planning and Forecasting Financial Statements
Financial Planning and Forecasting Financial Statements
CHAPTER 4
Financial Planning and Forecasting
Financial Statements
Forecast sales
Project the assets needed to support
sales
Project internally generated funds
Project outside funds needed
Decide how to raise funds
See effects of plan on ratios and
stock price
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4-4
2001 Balance Sheet
(Millions of $)
Sales $2,000.00
Less: COGS (60%) 1,200.00
SGA costs 700.00
EBIT $ 100.00
Interest 16.00
EBT $ 84.00
Taxes (40%) 33.60
Net income $ 50.40
Dividends (30%) $15.12
Add’n to RE $35.28
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4-6
Key Ratios
NWC Industry Condition
BEP 10.00% 20.00% Poor
Profit Margin 2.52% 4.00% “
ROE 7.20% 15.60% “
DSO 43.20 days 32.00 days “
Inv. turnover 8.33x 11.00x “
F.A. turnover 4.00x 5.00x “
T.A. turnover 2.00x 2.50x “
Debt/ assets 30.00% 36.00% Good
TIE 6.25x 9.40x Poor
Current ratio 2.50x 3.00x “
Payout ratio 30.00% 30.00% O.K.
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4-7
Assets
Assets = 0.5 sales
1,250 Assets =
(A*/S0)Sales
1,000
= 0.5($500)
= $250.
0 2,000 2,500
Sales
A*/S0 = $1,000/$2,000 = 0.5 = $1,250/$2,500.
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4 - 10
2001 2002
Actual Proj.
COGS/Sales 60% 60%
SGA/Sales 35% 35%
Cash/Sales 1% 1%
Acct. rec./Sales 12% 12%
Inv./Sales 12% 12%
Net FA/Sales 25% 25%
AP & accr./Sales 5% 5%
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4 - 14
Other Inputs
2001 2002(E)
Net operating WC $400$500
(CA - AP & accruals)
Total operating capital $900$1,125
(Net op. WC + net FA)
NOPAT $60$75
(EBITx(1-T))
Less Inv. in op. capital $225
Free cash flow -$150
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4 - 29
Suppose in 2001 fixed assets had been
operated at only 75% of capacity.
Actual sales
Capacity sales =
% of capacity
$2,000
= = $2,667.
0.75
With the existing fixed assets, sales
could be $2,667. Since sales are
forecasted at only $2,500, no new
fixed assets are needed.
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4 - 30
How would the excess capacity
situation affect the 2002 AFN?
Before After
DSO (days) 43.20 32.00
Accts. rec./Sales 12.00% 8.89%
Inventory turnover 8.33x 11.00x
Inventory/Sales 12.00% 9.09%
Before After
Free cash flow (1999) -$150.0 $0.5
ROIC (NOPAT/Capital) 6.7% 7.7%
ROE 7.7% 8.59%
0
Base
Stock
2,000 2,500
Sales
1,500
1,000
500
Sales
500 1,000 2,000
A/S changes if assets are lumpy. Generally will have
excess capacity, but eventually a small S leads to a
large A.
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4 - 39
Summary: How different factors affect
the AFN
forecast.
Excess capacity:
Existence lowers AFN.
Base stocks of assets:
Leads to less-than-proportional asset
increases.
Economies of scale:
Also leads to less-than-proportional asset
increases.
Lumpy assets:
Leads to large periodic AFN requirements,
recurring excess capacity.
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4 - 40
Regression Analysis for Asset
Forecasting
Example of Regression
Inventory Constant
ratio forecast
For a Well-Managed Co. Regression
Year Sales Inv. line
1999 $1,280 $118
2000 1,600 138
2001 2,000 162
2002E 2,500E 192E Sales
1.28 1.6 2.0 2.5 (000)