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Chapter14FinancialPlanningForecasting

Chapter14FinancialPlanningForecasting - OEM 2009 Program...

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OEM 2009 Program Financial Planning and Forecasting Page 1 CHAPTER 14 Financial Planning And Forecasting Additional Funds Needed Since a balance sheet must balance, an increase in total assets must be offset by an increase in total liabilities and shareholders’ equity and shareholders equity. Additional funds needed are equal to the required increases in assets, less spontaneous increases in liabilities, minus increases in retained earnings. Equation Method AFN = (A * /S 0 ) Δ S - (L * /S 0 ) Δ S - M(S 1 )(1-d) where: A * = Increasing assets L * = Spontaneous liabilities M = Profit margin d = Dividend payout rate S = Current and projected sales Year 0 Starting Point Sales $5,000 100% Sales Costs -$3,000 60% Sales EBIT $2 000 Income Statement Year 0 Item Percent $2,000 Interest -$200 EBT $1,800 Taxes -$900 50% EBT Net Income $900 18% Sales Dividends $400 44% NI To Retained Earnings $500 Year 0 Starting Point Cash $200 0.04 Sales Receivables $1,500 0.30 Sales Inventory $3 300 0 66 Sales Item Assets Year 0 Percent $3,300 0.66 Fixed Assets $2,000 0.40 Sales Total Assets $7,000 1.40 Sales Year 0 Starting Point Accounts Payable $500 0.10 Sales Notes Payable $1,000 A l $500 0 10 S l Item Percent Liabilities & Equity Year 0 Accruals 0.10 Sales Long-term Debt $1,000 Common Stock $800 Retained Earnings $3,200 Total Liabilities & Equity $7,000
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OEM 2009 Program Financial Planning and Forecasting Page 2 AFN Example: Assumptions Firm expects sales to increase 40% from $5,000 to $7,000. Firm does not have excess capacity and will need to increase fixed assets. All assets will grow proportionately with growth in sales. AFN Example: Assumptions Payables and accruals will grow proportionately with growth in sales.
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