Finance management cengage 2013 chapter 017

Chapter 17

Financial Planning and Forecasting
Forecasting Sales
Projecting the Assets and Internally
Generated Funds
Projecting Outside Funds Needed
Deciding How to Raise Funds
17-1
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Preliminary Financial Forecast:
Balance Sheets (Assets)

Cash and equivalents
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets

2012
$ 20
240
240
$ 500
500
$1,000

2013E

$ 25
300
300
$ 625
625
$1,250

17-2
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Preliminary Financial Forecast: Balance Sheets
(Liabilities and Equity)

A/P & accrued liabilities
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total liabilities & equity

2012
$ 100
100
$ 200
100
500
200
$1,000

2013E
$ 125
190
$ 315
190
500
245
$1,250

17-3
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Preliminary Financial Forecast:
Income Statements

Sales
Variable costs
Fixed costs
EBIT
Interest
EBT
Taxes (40%)
Net income
Dividends (30% of NI)
Addition to retained earnings

2012
$2,000.0

1,200.0
700.0
$ 100.0
16.0
$ 84.0
33.6
$ 50.4

2013E
$2,500.0
1,500.0
875.0
$ 125.0
16.0
$ 109.0
43.6
$ 65.4

$15.12
$35.28

$19.62
$45.78

17-4

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Key Financial Ratios

2012
Basic earning power
Profit margin
Return on equity
Days sales outstanding
Inventory turnover
Fixed assets turnover
Total assets turnover
Debt/Assets

10.00%
2.52%

2013E
10.00%
2.62%

Ind Avg
20.00%
4.00%

7.20%
8.77%
15.60%
43.8 days 43.8 days 32.0 days
8.33x
8.33x
11.00x
4.00x
4.00x

5.00x
2.00x
2.00x
2.50x

Comment
Poor
Poor
Poor
Poor
Poor
Poor
Poor
OK

30.00%
40.40%
36.00%
17-5
© 2013 Cengage
Times
Learning.
interest
All Rights Reserved.
earnedMay not be scanned,
6.25x
copied, or duplicated,
7.81x
or posted to a publicly
9.40x

accessible website,
Poorin whole or in part.


Key Assumptions in Preliminary Financial Forecast for
NWC

•
•
•

Operating at full capacity in 2012.

•

2012 profit margin (2.52%) and payout (30%) will
be maintained.

•

Sales are expected to increase by $500 million.
(%∆S = 25%)

Each type of asset grows proportionally with sales.
Payables and accruals grow proportionally with
sales.

17-6
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

Determining Additional Funds Needed Using the AFN
Equation
AFN = (A0*/S0)∆S – (L0*/S0)∆S – M(S1)(1 – Payout)
= ($1,000/$2,000)($500)
– ($100/$2,000)($500)
– 0.0252($2,500)(0.7)
= $180.9 million

17-7
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Management’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.

17-8
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Revised (Final) Financial Forecast:
Balance Sheets (Assets)

Cash and equivalents
Accounts receivable
Inventories
Total current assets
Net fixed assets
Total assets

2012
$ 20
240

240
$ 500
500
$1,000

2013F
$ 67
233
250
$ 550
700
$1,250

17-10
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Key Financial Ratios: Final Forecast

Basic earning power
Profit margin
Return on equity
Days sales outstanding
Inventory turnover
Fixed assets turnover
Total assets turnover
Debt/Assets
Times interest earned
Current ratio
Payout ratio

2012
10.00%
2.52%
7.20%

2013F
10.00%
2.62%
8.77%

Ind Avg
20.00%
4.00%
15.60%

Comment
Poor
Poor
Poor

43.8 days
8.33x
4.00x
2.00x
30.00%
6.25x
2.50x
30.00%

34.0 days
10.00x
3.57x
2.00x
40.40%
7.81x
1.98x
30.00%

32.0 days
11.00x
5.00x
2.50x
36.00%
9.40x
3.00x
30.00%

OK
OK
Poor
OK
Poor
Poor
Poor
OK
17-11

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.

What was the net investment in capital?
Capital2013 = NOWC + NetFA
= $625 − ($315 − $190) + $625
= $625 − $125 + $625
= $1,125
Capital2012 = $900
Net investment in capital = $1,125 − $900
= $225

17-12
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


Suppose 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:
Capacity sales = Actual sales/ % of capacity
= $2,000/0.85 = $2,353

•

2013 forecast sales exceed the capacity sales, so
new fixed assets are required to support 2013
sales.

17-14
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


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
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.


How would the following items affect the AFN?

•

Higher dividend payout ratio?

•

Higher profit margin?

•
•

– Increase AFN: Less retained earnings.
– 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., L0*/S0 increases).

17-16
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.