Financial Planning and Forecasting Financial Statements.ppt
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1、,CHAPTER 11Financial Planning and Forecasting Financial Statements,Financial planningAdditional Funds Needed (AFN) formulaPro forma financial statementsSales forecastsPercent of sales method,Financial Planning and Pro Forma Statements,Three important uses:Forecast the amount of external financing th
2、at will be requiredEvaluate the impact that changes in the operating plan have on the value of the firmSet appropriate targets for compensation plans,Steps in Financial Forecasting,Forecast salesProject the assets needed to support salesProject internally generated fundsProject outside funds neededD
3、ecide how to raise fundsSee effects of plan on ratios and stock price,2002 Balance Sheet(Millions of $),Cash & sec.,$ 20,Accts. pay. &,accruals,$ 100,Accounts rec.,240,Notes payable,100,Inventories,240,Total CL,$ 200,Total CA,$ 500,L-T debt,100,Common stk,500,Net fixed,assets,Retained,earnings,200,T
4、otal assets,$1,000,Total claims,$1,000,500,2002 Income Statement(Millions of $),Sales,$2,000.00,Less: COGS (60%),1,200.00,SGA costs,700.00,EBIT,$ 100.00,Interest,10.00,EBT,$ 90.00,Taxes (40%),36.00,Net income,$ 54.00,Dividends (40%),$21.60,Addn to RE,$32.40,AFN (Additional Funds Needed):Key Assumpti
5、ons,Operating at full capacity in 2002.Each type of asset grows proportionally with sales.Payables and accruals grow proportionally with sales.2002 profit margin ($54/$2,000 = 2.70%) and payout (40%) will be maintained.Sales are expected to increase by $500 million.,Definitions of Variables in AFN,A
6、*/S0: assets required to support sales; called capital intensity ratio.S: increase in sales.L*/S0: spontaneous liabilities ratioM: profit margin (Net income/sales)RR: retention ratio; percent of net income not paid as dividend.,Assets,Sales,0,1,000,2,000,1,250,2,500,A*/S0 = $1,000/$2,000 = 0.5,= $1,
7、250/$2,500., Assets =(A*/S0)Sales= 0.5($500)= $250.,Assets = 0.5 sales,Assets must increase by $250 million. What is the AFN, based on the AFN equation?,AFN= (A*/S0)S - (L*/S0)S - M(S1)(RR)= ($1,000/$2,000)($500) - ($100/$2,000)($500) - 0.0270($2,500)(1 - 0.4)= $184.5 million.,How would increases in
8、 these items affect the AFN?,Higher sales:Increases asset requirements, increases AFN.Higher dividend payout ratio:Reduces funds available internally, increases AFN.,(More),Higher profit margin:Increases funds available internally, decreases AFN.Higher capital intensity ratio, A*/S0:Increases asset
9、requirements, increases AFN.Pay suppliers sooner:Decreases spontaneous liabilities, increases AFN.,Projecting Pro Forma Statements with the Percent of Sales Method,Project sales based on forecasted growth rate in salesForecast some items as a percent of the forecasted salesCostsCashAccounts receivab
10、le,(More.),Items as percent of sales (Continued.)InventoriesNet fixed assetsAccounts payable and accrualsChoose other itemsDebtDividend policy (which determines retained earnings)Common stock,Sources of Financing Needed to Support Asset Requirements,Given the previous assumptions and choices, we can
11、 estimate:Required assets to support salesSpecified sources of financingAdditional funds needed (AFN) is:Required assets minus specified sources of financing,Implications of AFN,If AFN is positive, then you must secure additional financing.If AFN is negative, then you have more financing than is nee
12、ded.Pay off debt.Buy back stock.Buy short-term investments.,How to Forecast Interest Expense,Interest expense is actually based on the daily balance of debt during the year.There are three ways to approximate interest expense. Base it on: Debt at end of yearDebt at beginning of yearAverage of beginn
13、ing and ending debt,More,Basing Interest Expense on Debt at End of Year,Will over-estimate interest expense if debt is added throughout the year instead of all on January 1. Causes circularity called financial feedback: more debt causes more interest, which reduces net income, which reduces retained
14、 earnings, which causes more debt, etc.,More,Basing Interest Expense on Debt at Beginning of Year,Will under-estimate interest expense if debt is added throughout the year instead of all on December 31. But doesnt cause problem of circularity.,More,Basing Interest Expense on Average of Beginning and
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