Financial Planning and Forecasting <ul><li>Chapter 16 </li></ul><ul><li>Forecasting Sales </li></ul><ul><li>Projecting the...
Preliminary Financial Forecast: Balance Sheets (Assets) 16- 2008 2009E Cash and equivalents $  20 $  25 Accounts receivabl...
Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity) 16- 2008 2009E Accts payable & accrued liab. $  10...
Preliminary Financial Forecast:  Income Statements 16- 2008 2009E Sales $2,000.0 $2,500.0 Less: Variable costs 1,200.0 1,5...
Key Financial Ratios 16- 2008 2009E Ind Avg Comment Basic earning power 10.00% 10.00% 20.00% Poor Profit margin 2.52% 2.62...
Key Assumptions in Preliminary Financial Forecast for NWC <ul><li>Operating at full capacity in 2008. </li></ul><ul><li>Ea...
Determining Additional Funds Needed Using the AFN Equation <ul><li>AFN =  (A 0 */S 0 )  S – (L 0 */S 0 )  S – M(S 1 )(RR...
Management’s Review of the Financial Forecast <ul><li>Consultation with some key managers has yielded the following revisi...
Management’s Review of the Financial Forecast <ul><li>These changes will lead to adjustments in the firm’s assets and will...
Revised (Final) Financial Forecast: Balance Sheets (Assets) 16- 2008 2009F Cash and equivalents $  20 $  67 Accounts recei...
Key Financial Ratios – Final Forecast 16- 2008 2009F Ind Avg Comment Basic earning power 10.00% 10.00% 20.00% Poor Profit ...
What was the net investment in capital? 16-
How much free cash flow is expected to be generated in 2009? <ul><li>FCF = EBIT(1 – T) – Net investment in capital </li></...
Suppose Fixed Assets Had Been Operating at Only 85% of Capacity in 2008 <ul><li>The maximum amount of sales that can be su...
How can excess capacity affect the forecasted ratios? <ul><li>Sales wouldn’t change but assets would be lower, so turnover...
How would the following items affect the AFN? <ul><li>Higher dividend payout ratio? </li></ul><ul><ul><li>Increase AFN: Le...
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PPT Chap 16

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PPT Chap 16

  1. 1. Financial Planning and Forecasting <ul><li>Chapter 16 </li></ul><ul><li>Forecasting Sales </li></ul><ul><li>Projecting the Assets and Internally Generated Funds </li></ul><ul><li>Projecting Outside Funds Needed </li></ul><ul><li>Deciding How to Raise Funds </li></ul>16-
  2. 2. Preliminary Financial Forecast: Balance Sheets (Assets) 16- 2008 2009E Cash and equivalents $ 20 $ 25 Accounts receivable 240 300 Inventories 240 300 Total current assets $ 500 $ 625 Net fixed assets 500 625 Total assets $1,000 $1,250
  3. 3. Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity) 16- 2008 2009E Accts payable & accrued liab. $ 100 $ 125 Notes payable 100 190 Total current liabilities 200 315 Long-term debt 100 190 Common stock 500 500 Retained earnings 200 245 Total liabilities & equity $1,000 $1,250
  4. 4. Preliminary Financial Forecast: Income Statements 16- 2008 2009E Sales $2,000.0 $2,500.0 Less: 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 $ 65.40 Dividends (30% of NI) $15.12 $19.62 Addition to retained earnings $35.28 $45.78
  5. 5. Key Financial Ratios 16- 2008 2009E 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
  6. 6. Key Assumptions in Preliminary Financial Forecast for NWC <ul><li>Operating at full capacity in 2008. </li></ul><ul><li>Each type of asset grows proportionally with sales. </li></ul><ul><li>Payables and accruals grow proportionally with sales. </li></ul><ul><li>2008 profit margin (2.52%) and payout (30%) will be maintained. </li></ul><ul><li>Sales are expected to increase by $500 million. (%  S = 25%) </li></ul>16-
  7. 7. Determining Additional Funds Needed Using the AFN Equation <ul><li>AFN = (A 0 */S 0 )  S – (L 0 */S 0 )  S – M(S 1 )(RR) </li></ul><ul><li>= ($1,000/$2,000)($500) </li></ul><ul><li> – ($100/$2,000)($500) </li></ul><ul><li> – 0.0252($2,500)(0.7) </li></ul><ul><li>= $180.9 million </li></ul>16-
  8. 8. Management’s Review of the Financial Forecast <ul><li>Consultation with some key managers has yielded the following revisions: </li></ul><ul><ul><li>Firm expects customers to pay quicker next year, thus reducing DSO to 34 days without affecting sales. </li></ul></ul><ul><ul><li>A new facility will boost the firm’s net fixed assets to $700 million. </li></ul></ul><ul><ul><li>New inventory system to increase the firm’s inventory turnover to 10x, without affecting sales. </li></ul></ul>16-
  9. 9. Management’s Review of the Financial Forecast <ul><li>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. </li></ul>16-
  10. 10. Revised (Final) Financial Forecast: Balance Sheets (Assets) 16- 2008 2009F Cash and equivalents $ 20 $ 67 Accounts receivable 240 233 Inventories 240 250 Total current assets $ 500 $ 550 Net fixed assets 500 700 Total assets $1,000 $1,250
  11. 11. Key Financial Ratios – Final Forecast 16- 2008 2009F 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 Poor Debt/assets 30.00% 40.40% 36.00% OK Times interest earned 6.25x 7.81x 9.40x Poor Current ratio 2.50x 1.98x 3.00x Poor Payout ratio 30.00% 30.00% 30.00% OK
  12. 12. What was the net investment in capital? 16-
  13. 13. How much free cash flow is expected to be generated in 2009? <ul><li>FCF = EBIT(1 – T) – Net investment in capital </li></ul><ul><li>= $125(0.6) – $225 </li></ul><ul><li>= $75 – $225 </li></ul><ul><li>= -$150 </li></ul>16-
  14. 14. Suppose Fixed Assets Had Been Operating at Only 85% of Capacity in 2008 <ul><li>The maximum amount of sales that can be supported by the 2008 level of assets is: </li></ul>16- <ul><li>2009 forecast sales exceed the capacity sales, so new fixed assets are required to support 2009 sales. </li></ul>
  15. 15. How can excess capacity affect the forecasted ratios? <ul><li>Sales wouldn’t change but assets would be lower, so turnovers would improve. </li></ul><ul><li>Less new debt, hence lower interest and higher profits </li></ul><ul><ul><li>EPS, ROE, debt ratio, and TIE would improve. </li></ul></ul>16-
  16. 16. How would the following items affect the AFN? <ul><li>Higher dividend payout ratio? </li></ul><ul><ul><li>Increase AFN: Less retained earnings. </li></ul></ul><ul><li>Higher profit margin? </li></ul><ul><ul><li>Decrease AFN: Higher profits, more retained earnings. </li></ul></ul><ul><li>Higher capital intensity ratio? </li></ul><ul><ul><li>Increase AFN: Need more assets for given sales. </li></ul></ul><ul><li>Pay suppliers in 60 days, rather than 30 days? </li></ul><ul><ul><li>Decrease AFN: Trade creditors supply more capital (i.e., L 0 */S 0 increases). </li></ul></ul>16-

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