8.1 Lecture_15_Mon_14th_Sept

8.1 Lecture_15_Mon_14th_Sept - FINC202 FINC202 2009 Lecture...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: FINC202 FINC202 2009 Lecture 15 Lecture FINANCIAL PLANNING & FORECASTING FORECASTING Brigham and Houston Chapter 17 1 Introduction: Why bother forecasting? • How share prices behave: Rise with news of improved earnings Fall on news of lowered earnings and losses But ___________________________________. • • Firms want to maximise share price and minimise effect of any bad earnings news, therefore: Make forecasts for firm’s own use (forward planning) Also feed forecasts to external analysts 2 Format of Lecture: • Overview of Planning System (Brief) Strategic Plans Operating Plans Financial Plans • Computational Forecasting Methods Percent of Sales Method + AFN Equation (next lecture) 3 Strategic Plans You’ve got to know where you are going You’ve got to know where you are going • Mission Statement provides condensed version (See Coca­ Cola): Corporate Purpose • “We exist to create value for our shareowners on a long­term basis by building a business that enhances the Coca­Cola Company’s trademarks” Corporate Scope • Soft drink ______________________________ 4 Corporate Objectives (qualitative): “ …we succeed or fail based on our ability… as stewards of several key assets: 1. 2. 3. 4. 5. 6. The world’s most powerful trademark The world’s most pervasive and effective distribution system Satisfied customers who make good profit selling our goods Our people (employees) Our __________________________ Our strong global leadership in the beverage industry 5 Corporate Objectives (quantitative): • Attain a 50% market share • Attain a 20% ROE • Attain a 10% earnings growth rate • Attain a $100m EVA Executive bonus are based on achieving quantitative objectives Corporate Strategy How the firm goes about achieving the objectives • No frills service versus ______________ 6 Operating Plans You’ve got to know what you’re doing Provide detailed implementation guidance • Marketing • Processing • Finance Five­year horizon • Great detail for first year • ____________________________ 7 Six steps The Financial Plan 1. 2. 3. Create pro­forma financial statements Determine funds needed Forecast availability of funds • • Internally generated Obtained from investors 1. 2. 3. Create system of controls governing fund allocation Develop ________________________________ Establish performance­based management compensation 8 system Percentage of Sales (POS) A method of forecasting future financial statements where: • • Each item is forecasted as a percentage of the projected sales figure The percentages can be kept constant or ___________________________________ 9 Percent of Sales (POS) Method • This method is NOT a discounted cash flow method Therefore we do NOT use WACC or anything else as a discount rate We also do NOT remove interest expense from our calculations Because this is NOT an assessment of effect of new projects on cash flows • • We leave Interest Expense in place in our Income Statement. The purpose is to forecast funding requirements to service growth in sales Where ________________________________________ 10 2. Percent of Sales (POS) Method • But the POS method may be seen as an additional tool for working out planning of funding In addition to discounted cash flow analysis • Which you looked at in FINC201 • …and in the WACC part of FINC202 Ie, a __________________________________ • POS method has two sets of steps: 1st set: _________________________________ 2nd set: Prepare pro forma Balance Sheet 11 Problem 1 for POS Method As we go through the Addis Ltd example As we go through the Addis Ltd example • Please consider the Bison Ltd handout. 12 Addis Ltd Worked Example: Key Assumptions • • • • • • Operating at full capacity in 2009. Each type of asset grows proportionally with sales. Payables and accruals grow ___________________. 2009 profit margin (2.52%) and dividend payout (30%) will be maintained. The tax rate is 40%. Sales are expected to increase by $500 million. (%∆ S = 25%) 13 Addis Ltd: Addis Assumptions about how AFN will be raised Assumptions • The payout ratio will remain at 30 percent (d = 30%; 1­d = 70%). • 1­d = ploughback ratio. • • No new common stock will be issued. 1­d can also be called “Retention Rate”, RR Any external funds needed will be raised as debt: 50% notes payable and 50% Long Term debt. 14 POS STEP 1: Pro Forma Statement of Pro Financial Performance Financial • Breaks into three sub­steps: Prepare sales forecast increase Expenditure items by sales growth Determine NPAT and Dividend • Given the __________________________. 15 Addis Ltd: 2010 Forecasted Income Statement 2009 2010 Forecast Sales Less: VC FC EBIT Interest EBT Taxes (40%) Net income $2,000 1,200 700 $ 100 16 $ 84 34 $ 50 $2,500 1,500 875 $ 125 16 $ 109 44 $ 65 $19 $46 Div. (30%) $15 Addition to RE $35 16 POS STEP 2: Breaks down to 5 sub­steps: Balance Sheet 1. Increase proportional A*, L* items by sales growth. (1st approx) Note that all current assets are considered to be: Proportional Spontaneous Non­negotiated Estimate/carry­over non­proportional A, L items (Note: no asterisk! 1st approximation) _______________________________ ____________________________(1st approximation) 17 1. 1. 1. 2. Use AFN as balancing figure (1st approximation) Distribute AFN among sources of cash (2nd approximation) : (a) Reduce Cash or Marketable Securities (if permitted) (b) Increase various liabilities (where permitted) (required in the example!) POS STEP 2 continued: (c ) _________________________________ 18 (ie, _______________________________) Addis Ltd: 2010 Balance Sheet (Assets) 2009 Cash $ 20 Accts. rec. 240 Inventories 240 Total CA $ 500 Net FA 500 Total assets $1,000 2010 1st Pass $ 25 300 300 $ 625 625 $1,250 1.25 x 1.25 x 1.25 x x 1.25 19 Addis Ltd: 2010 Balance Sheet Addis (Claims) (Claims) 2009 AP/accruals $ 100 Notes payable 100 Total CL $ 200 L-T debt 100 Common stk. 500 Ret.earnings 200 Total claims $1,000 x 1.25 +46* 2010 1st Pass $ 125 100 $ 225 100 500 246 $1,071 20 What is the additional financing needed What (AFN)? (AFN)? • • • • Required increase in assets Less Spontaneous increase in liab. Less Increase in retained earnings Equals Total AFN = $ 250 = $ 25 = $ 46 = $ 179 • • • Firm must have the assets to make forecasted sales. The balance sheet must balance. So, ______________________________. 21 How will the AFN be Financed? Additional notes payable = 0.5($179) = Additional Long-Term debt = 0.5($179) = But this financing will add to interest expense, which will lower NPAT and RE. We will generally ignore financing feedbacks. These would be handled well by a computer 22 2010 2nd Pass Balance Sheet (Assets) 1st Pass Cash $ 25 Accts. rec. 300 Inventories 300 Total CA $ 625 Net FA 625 Total assets $1,250 2nd Pass $ 25 300 300 $ 625 625 $1,250 23 2010 2nd Pass Balance Sheet (Claims) 1st Pass AP/accruals $ 125 Notes payable 100 Total CL $ 225 L-T debt 100 Common stk. 500 Ret. earnings 246 Total claims $1,069 2nd Pass $ 125 190 $ 315 189 500 246 $1,250 24 End-point • • The pro­forma balance sheet for next year now balances We have worked out we have to raise $179 From Notes Payable: $89.50 From Long­term Debt: $89.50 • Please note that the solution to the Bison Problem will be put into LEARN The allocation of fund­raising to particular sources is more complex in this problem than in the Addis Ltd example 25 • • • Used by large firms in financial planning Advantages: easier to construct pro­forma statements useful for “what­if” analysis Limitations: 1. tempting to make model more detailed • Computerised Financial Planning Computerised Models Models ________________________________ _______________________________________________ 26 2. 3. based on accounting conventions, not finance doesn’t indicate optimal course of action ...
View Full Document

Ask a homework question - tutors are online