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Financial Planning and Forecasting
 

Financial Planning and Forecasting

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    Financial Planning and Forecasting Financial Planning and Forecasting Presentation Transcript

    • Financial Planning and Forecasting: Cash Flows and Financial Statement Analysis Corporate Finance Dr. A. DeMaskey
    • Learning Objectives
      • Questions to be answered:
        • What are the basic financial statements and how are they used?
        • What kinds of financial information do users need?
        • What is the difference between accounting income and cash flow?
        • How are different sources of income taxed based on the U.S. tax code?
        • How are financial statements used by managers to improve performance?
    • Financial Statements
      • Balance Sheet
      • Income Statement
      • Statement of Retained Earnings
      • Statement of Cash Flows
    • Cash Flows
      • Net Cash Flows
      • Free Cash Flows
      • Operating Cash Flows
    • MVA and EVA
      • Market Value Added (MVA)
      • Economic Value Added (EVA)
    • Individual Income Taxes
      • Taxable Income
      • Marginal versus Average Tax Rate
      • Taxes on Dividend and Interest Income
      • Capital Gains versus Ordinary Income
    • Corporate Income Taxes
      • Interest and Dividend Income Received by a Corporation
      • Interest and Dividend Income Paid by a Corporation
      • Ordinary Gains and Losses
      • Capital Gains and Losses
      • Corporate Loss Carry-Back and Carry-Forward
    • Financial Statement Analysis
      • Ratio Analysis
        • Liquidity ratios
        • Asset management ratios
        • Debt management ratios
        • Profitability ratios
        • Market value ratios
      • Du Pont System
        • ROA
        • ROE
      Expense control (PM) Asset utilization (TATO) Debt utilization (EM)
    • Limitations of Ratio Analysis
      • Large firms
      • Industry averages
      • Inflation
      • Window dressing
      • Accounting practices
      • Operating policies
      • Interpretation of ratios
    • Qualitative Factors
      • Key customer
      • Key product
      • Single supplier
      • Foreign sales
      • Competition
      • Future prospects
      • Legal and regulatory environment
    • Financial Planning and Forecasting Financial Statements
      • Plans: strategic, operating, and financial
      • Pro forma financial statements
        • Sales forecasts
        • Percent of sales method
      • Additional Funds Needed (AFN) formula
    • Pro Forma Financial Statements
      • Three important uses:
        • Forecast the amount of external financing that will be required
        • Evaluate the impact that changes in the operating plan have on the value of the firm
        • Set appropriate targets for compensation plans
    • Steps in Financial Forecasting
      • 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
    • Sales Forecast
      • Division sales forecasts based on historical growth
      • Level of economic activity and overall demand for the product
      • Market share for each product line in each market
      • If foreign sales, include currency fluctuations, trade agreements, governmental policies, etc.
      • Inflation
      • Advertising campaigns, promotional discounts, credit terms, etc.
    • Projecting Pro Forma Statements with the Percent of Sales Method
      • Project sales based on forecasted growth rate in sales
      • Forecast some items as a percent of the forecasted sales
        • Costs
        • Cash
        • Accounts receivable
      • Items as percent of sales
        • Inventories
        • Net fixed assets
        • Accounts payable and accruals
      • Choose other items
        • Debt (which determines interest)
        • Dividends (which determines retained earnings)
        • Common stock
    • What are the additional funds needed (AFN)? AFN = Required asset increase - Spontaneous liability increase - Increase in retained earnings
    • 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
    • Other Techniques for Forecasting Financial Statements
      • Regression Analysis for Asset Forecasting
        • Relationship between type of asset and sales is linear.
        • Get historical data on a good company, then fit a regression line to see how much a given sales increase will require in way of asset increase.
      • Excess Capacity Adjustments
        • Full capacity sales
        • Target fixed assets-to-sales ratio
        • Required level of fixed assets