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Unformatted text preview: Finance II: Forecasting ENG 185A and 285A November 2, 2009 Karen Smith Bogart Today Capstone Questions for Isaac 2 Capstone Presentations Spencer Sporting Goods Financial Statements Ratios Forecasting Vocabulary: Income Statement
Cost of goods sold Gross profit Operating expenses: Selling, general and administrative Research and development Operating profit Investment income Pretax income Income tax expense Net income
$ 4,298 463 4,254 191 4,445 1,402 3,043 $ 49,205 40,190 9,015 Vocabulary: Balance Sheet Ratios Need to compare across industry or time!!! Liquidity Capital Structure and Solvency Return on Investment Operating Performance Asset Utilization Market Measures Ratios... Adapted from Wild, John J. "Financial Statement Analysis" 9th ed. (McGraw-Hill/Irwin 2007) More Ratios... Adapted from Wild, John J. "Financial Statement Analysis" 9th ed. (McGraw-Hill/Irwin 2007) More Ratios... Adapted from Wild, John J. "Financial Statement Analysis" 9th ed. (McGraw-Hill/Irwin 2007) More Ratios... Adapted from Wild, John J. "Financial Statement Analysis" 9th ed. (McGraw-Hill/Irwin 2007) More Ratios... Adapted from Wild, John J. "Financial Statement Analysis" 9th ed. (McGraw-Hill/Irwin 2007) Ratios Adapted from Wild, John J. "Financial Statement Analysis" 9th ed. (McGraw-Hill/Irwin 2007) Thinking Toward the Future...
Recall: Assets = Liabilities + Equity Split equity to: Owners' Equity + additional external investment Now rearrange: Additional External Investment = Assets - (Liabilities + Owners' Equity) Thinking Toward the Future... Sales forecasting Directions & trends in sales Market share Industry & economic conditions Productive and financial capacity Competitive factors Pro Forma Financial Statements Income Statement for forecast period Balance Sheet for end of forecast period Ratios based on these statements Compare against history for feasibility IT Technologies, Inc. Sales for next six months ended 30 June: $1M ($thousand) January 100 February 125 March 150 April 175 May 200 June 250 IT Technologies, Inc. Cash at 1 January: $15,000 Minimum monthly cash balances ($thousand): January 20 February 25 March 27 April 30 May 30 June 30 External Financing Needs Credit Equipment purchase, to be paid at $1,000/month starting in February, not operational until August: $20,000 IT Technologies, Inc. Acquired L/T Bonds $110,000 (less $2,500 issuance costs). Bond sales planned as: April May $50,000 $60,000 IT Technologies, Inc. Additional cash sources:
May June $8,000 $50,000 Equipment sale (cost = $50K, bv = 0)
June $25,000 Short Term Loan ... Pro Forma... Establish receivables collections pattern:
Collections Month of Sale Second Month Third Month Fourth Month Written off as bad debt % Total Receivables 40% 30 20 5 5 100% Apply that pattern to projected sales...
Exhibit 9A.1 Exhibit 9A.2 Total Estimated Expenses...
($thousand) January $67.0 February 67.5 March 65.5 April 69.0 May 67.0 June 71.0 Apply expenses to cash payments...
Exhibit 9A.3 Exhibit 9A.4 Exhibit 9A.5 Exhibit 9A.6 Feasibility? Check historical trends: Over six months ended 30 June, projected return on equity = 9% Current ratio
January June 2.6 3.5 Substantiate abnormalities or adjust for them... Feasibility? Sensitivity analysis Looks at what happens if one factor is off Scenario analysis Looks at what happens to multiple factors if one event happens Scenario Analysis Singular events that could ruin you: Loss of major customer Entry of competition New product introduction Change in perception/taste Extreme fluxes in income/external factors Growth Management
Growth is good Larger market share --> larger profits But... Rapid growth can over extend resources... If actual growth exceeds sustainable growth Sell new equity Increase financial leverage Reduce the dividend payout Prune away marginal activities Outsource some or all of production Increase prices Merge with a "cash cow" November 4 Readings for this Class: Grant, R. (2008). Contemporary Strategy Analysis. Chapters 6 and 17 Consider: Define alternative organizational theories and related assumptions? What are key organizational capabilities? How can they be used for competitive advantage? ...
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This document was uploaded on 05/02/2010.
- Spring '09