chapter9 - CHAPTER 9 Financial Planning and Forecasting Pro...

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  1 CHAPTER 9 Financial Planning and  Forecasting Pro Forma Financial  Statements
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  2 Topics in Chapter Financial planning Additional Funds Needed (AFN) formula Pro forma financial statements Sales forecasts Percent of sales method
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  3 Financial Planning and Pro  Forma 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
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  4 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
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  5 2006 Balance Sheet (Millions of $) $ 20 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 Total assets $1,000 Total claims $1,000 500
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  6 2006 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 Add’n to RE $32.40
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  7 AFN (Additional Funds Needed): Key Assumptions Operating at full capacity in 2006. Each type of asset grows proportionally with  sales. Payables and accruals grow proportionally  with sales. 2006 profit margin ($54/$2,000 = 2.70%) and  payout (40%) will be maintained. Sales are expected to increase by $500  million.
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  8 Definitions of Variables in AFN A*/S 0 : assets required to support sales;  called capital intensity ratio. ∆S: increase in sales. L*/S 0 : spontaneous liabilities ratio M: profit margin (Net income/sales) RR: retention ratio; percent of net  income not paid as dividend.
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  9 Assets Sales 0 1,000 2,000 1,250 2,500 A*/S 0 = $1,000/$2,000 = 0.5 = $1,250/$2,500. Assets = (A*/S 0 ) Sales = 0.5($500) = $250. Assets = 0.5 sales Assets vs. Sales
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  10 If assets increase by $250  million, what is the AFN? AFN =  (A*/S
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chapter9 - CHAPTER 9 Financial Planning and Forecasting Pro...

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