Part 14 Financial Planning and Forecasting Pro Forma Financial Statements Financial arranging Additional Funds Needed (AFN) equation Pro forma money related proclamations Sales gauges Percent of offers strategySlide 2
Financial Planning and Pro Forma Statements Three critical uses: Forecast the measure of outer financing that will be required Evaluate the effect that adjustments in the working arrangement have on the estimation of the firm Set proper focuses for pay arrangesSlide 3
Steps in Financial Forecasting Forecast deals Project the advantages expected to bolster deals Project inside produced stores Project outside assets required Decide how to raise reserves See impacts of plan on proportions and stock costSlide 4
2004 Balance Sheet (Millions of $) Cash & sec. $ 20 Accts. pay. & accumulations $ 100 Accounts rec. 240 Notes payable 100 Inventories 240 Total CL $ 200 Total CA $ 500 L-T obligation 100 Common stk 500 Net altered Retained 500 resources profit 200 Total resources $1,000 Total cases $1,000Slide 5
2004 Income Statement (Millions of $) $2,000.00 Sales 1,200.00 Less: COGS (60%) 700.00 SGA costs EBIT $ 100.00 10.00 Interest EBT $ 90.00 Taxes (40%) 36.00 Net pay $ 54.00 Dividends (40%) $21.60 Add\'n to RE $32.40Slide 6
AFN (Additional Funds Needed): Key Assumptions Operating at full limit in 2004. Every kind of benefit becomes relatively with deals. Payables and collections become relatively with deals. 2004 overall revenue ($54/$2,000 = 2.70%) and payout (40%) will be looked after . Deals are relied upon to increment by $500 million.Slide 7
Definitions of Variables in AFN A*/S 0 : resources required to bolster deals; called capital force proportion. S: increment in deals. L*/S 0 : unconstrained liabilities proportion M: net revenue (Net salary/deals) RR: maintenance proportion; percent of net pay not paid as profit.Slide 8
Assets = 0.5 deals 1,250 Assets = (A*/S 0 ) Sales = 0.5($500) = $250. 1,000 Sales 0 2,000 2,500 A*/S 0 = $1,000/$2,000 = 0.5 = $1,250/$2,500.Slide 9
Assets must increment by $250 million. What is the AFN, in light of the AFN condition? AFN = (A*/S 0 ) S - (L*/S 0 ) S - M(S 1 )(RR) = ($1,000/$2,000)($500) - ($100/$2,000)($500) - 0.0270($2,500)(1 - 0.4) = $184.5 million .Slide 10
How might increments in these things influence the AFN? Higher deals: Increases resource necessities, builds AFN. Higher profit payout proportion: Reduces stores accessible inside, expands AFN. (More… )Slide 11
Higher overall revenue: Increases stores accessible inside, reductions AFN. Higher capital force proportion, A*/S 0 : Increases resource necessities, builds AFN. Pay suppliers sooner: Decreases unconstrained liabilities, builds AFN.Slide 12
Projecting Pro Forma Statements with the Percent of Sales Method Project deals in light of guage development rate in deals Forecast a few things as a percent of the anticipated deals Costs Cash Accounts receivable (More...)Slide 13
Items as percent of offers (Continued...) Inventories Net altered resources Accounts payable and collections Choose different things Debt Dividend approach (which decides held profit) Common stockSlide 14
Sources of Financing Needed to Support Asset Requirements Given the past suspicions and decisions, we can evaluate: Required advantages for bolster deals Specified wellsprings of financing Additional assets required (AFN) is: Required resources short indicated wellsprings of financingSlide 15
Implications of AFN If AFN is sure, then you should secure extra financing. In the event that AFN is negative, then you have more financing than is required. Pay off obligation. Purchase back stock. Purchase transient ventures.Slide 16
How to Forecast Interest Expense Interest cost is really in light of the day by day adjust of obligation amid the year. There are three approaches to rough intrigue cost. Construct it with respect to: Debt at end of year Debt at start of year Average of starting and completion obligation More…Slide 17
Basing Interest Expense on Debt at End of Year Will over-gauge intrigue cost if obligation is included during the time rather than all on January 1. Causes circularity called budgetary criticism: more obligation causes more premium, which decreases net wage, which diminishes held income, which causes more obligation, and so forth. More…Slide 18
Basing Interest Expense on Debt at Beginning of Year Will under-gauge intrigue cost if obligation is included during the time rather than all on December 31. Be that as it may, doesn\'t bring about issue of circularity. More…Slide 19
Basing Interest Expense on Average of Beginning and Ending Debt Will precisely appraise the intrigue installments if obligation is included easily consistently. Yet, has issue of circularity. More…Slide 20
A Solution that Balances Accuracy and Complexity Base intrigue cost on starting obligation, yet utilize a somewhat higher loan cost. Simple to actualize Reasonably precise See Ch 14 Mini Case Feedback.xls for a case constructing interest cost with respect to normal obligation.Slide 21
Percent of Sales: Inputs 2004 2005 Actual Proj. Machine gear-pieces/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%Slide 22
Other Inputs Percent development in sales 25% Growth consider deals (g) 1.25 Interest rate on debt 10% Tax rate 40% Dividend payout rate 40%Slide 23
2005 Forecasted Income Statement 2005 first Pass Factor 2004 Sales $2,000 g= 1.25 $2,500.0 Less: COGS Pct= 60% 1,500.0 SGA Pct= 35% 875.0 EBIT $125.0 0.1(Debt 04 ) Interest 20.0 EBT $105.0 Taxes (40%) 42.0 Net. salary $63.0 Div. (40%) $25.2 Add. to RE $37.8Slide 24
2005 Balance Sheet (Assets) Forecasted resources are a percent of anticipated deals. 2005 Sales = $2,500 2005 Factor Cash $25.0 Pct= 1% Accts. rec. 300.0 Pct= 12% Inventories 300.0 Pct= 12% Total CA $625.0 Net FA 625.0 Pct= 25% Total resources $1,250.0Slide 25
2005 Preliminary Balance Sheet (Claims) 2005 Sales = $2,500 2005 2004 Factor Without AFN AP/gatherings Pct= 5% $125.0 Notes payable 100 100.0 Total CL $225.0 L-T obligation 100 100.0 Common stk. 500 500.0 Ret. profit 200 +37.8* 237.8 Total cases $1,062.8 *From determined salary explanation.Slide 26
What are the extra subsidizes required (AFN)? Required assets = $1,250.0 Specified wellsprings of fin. = $1,062.8 Forecast AFN = $ 187.2 NWC must have the resources for make guage deals, thus it needs an equivalent measure of financing. In this way, we should secure another $187.2 of financing.Slide 27
Assumptions about How AFN Will Be Raised No new basic stock will be issued. Any outer assets required will be raised as obligation, half notes payable , and half L-T obligation .Slide 28
How will the AFN be financed? Extra notes payable = 0.5 ($187.2) = $93.6 . Extra L-T debt = 0.5 ($187.2) = $93.6 .Slide 29
2005 Balance Sheet (Claims) w/o AFN With AFN AP/accruals $ 125.0 $ 125.0 Notes payable 100.0 +93.6 193.6 Total CL $ 225.0 $ 318.6 L-T debt 100.0 +93.6 193.6 Common stk. 500.0 500.0 Ret. earnings 237.8 Total claims $1,071.0 $1,250.0Slide 30
Equation AFN = $184.5 versus Master Forma AFN = $187.2. Why are they diverse? Condition technique expect a steady net revenue. Genius forma strategy is more adaptable. More vital, it permits distinctive things to develop at various rates.Slide 31
Forecasted Ratios 2004 2005(E) Industry Profit Margin 2.70% 2.52% 4.00% ROE 7.71% 8.54% 15.60% DSO (days) 43.80 43.80 32.00 Inv. turnover 8.33x 8.33x 11.00x FA turnover 4.00x 4.00x 5.00x Debt ratio 30.00% 40.98% 36.00% TIE 10.00x 6.25x 9.40x Current ratio 2.50x 1.96x 3.00xSlide 32
What are the determined free income and ROIC? 2004 2005(E) Net working WC $400 $500 (CA - AP & gatherings) Total working capital $900 $1,125 (Net operation. WC + net FA) NOPAT (EBITx(1-T)) $60 $75 Less Inv. in operation. capital $225 Free money flow -$150 ROIC (NOPAT/Capital) 6.7%Slide 33
Proposed Improvements DSO (days) 43.80 32.00 Accts. rec./Sales 12.00% 8.77% Inventory turnover 8.33x 11.00x Inventory/Sales 12.00% 9.09% SGA/Sales 35.00% 33.00% Before AfterSlide 34
Impact of Improvements (see Ch 14 Mini Case.xls for subtle elements) AFN $187.2 $15.7 Free money flow -$150.0 $33.5 ROIC (NOPAT/Capital) 6.7% 10.8% ROE 7.7% 12.3% Before AfterSlide 35
Capacity deals = Actual deals % of limit $2,000 0.75 = $2,667. Assume in 2004 settled resources had been worked at just 75% of limit. With the current settled resources, deals could be $2,667. Since deals are determined at just $2,500, no new settled resources are required .Slide 36
How might the overabundance limit circumstance influence the 2005 AFN? The already anticipated increment in settled resources was $125. Since no new altered resources will be required, AFN will fall by $125, to $187.2 - $125 = $62.2.Slide 37
Economies of Scale Assets 1,100 1,000 Declining A/S Ratio Base Stock Sales 0 2,000 2,500 $1,000/$2,000 = 0.5; $1,100/$2,500 = 0.44. Declining proportion indicates economies of scale . Going from S = $0 to S = $2,000 requires $1,000 of advantages. Next $500 of offers requires just $100 of advantages.Slide 38
Lumpy Assets 1,500 1,000 500 Sales 500 1,000 2,000 A/S changes if resources are uneven. For the most part will have overabundance limit, yet in the end a little S prompts an expansive A.Slide 39
Summary: How diverse components influence the AFN conjecture. Overabundance limit: brings down AFN. Economies of scale: prompts not as much as relative resource increments. Knotty resources: prompts expansive intermittent AFN necessities, repeating abundance limit.
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