MGMT310_lecture5_6

MGMT310_lecture5_6 - Lectures Lectures5and6...

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ctures 5 and 6 Last week we discussed…. Lectures 5 and 6 Financial planning (we’re about to pick up from where we left off) Btw, I’ve posted some more practice problems + solutions!
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No more interest free debt Recent (Actual) Financial Statements: come statement alance sheet Income statement Balance sheet Sales $1,000.00 CA $100 CL $ 50 Costs 900.00 FA 400 LTD 150 EBIT 100.00 Equity 300 Interest 15.00 Total $500 $500 Taxable Income 85.00 Taxes (35%) 29.75 et Income 55 25 Note: Now interest expense is 10% amount of LTD Net Income $ 55.25 Sales are projected to rise by 20%. Let’s assume costs, current assets, and fixed assets grow at the same rate as sales, and that 50% of net income must always be paid out in dividends. The firm’s financing strategy is: 1. Borrow short term first. If needed, borrow long term next. 2. Sell equity as a last resort Constraints: Current ratio must not fall below 2.0, Total debt ratio must not rise above 0.4
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What about operating capacity? Notice how so far, we’ve made fixed assets increase with projected increases in sales. That is, we’ve implicitly assumed that the firm was using its fixed assets at maximum capacity t’s now suppose that current capacity use is 70% and that the firm Let s now suppose that current capacity use is 70%, and that the firm anticipates increasing operating capacity to 80%. With our current fixed assets in place, what would be sales now? ith did l th ht i fi d t it ? With our desired sales growth, what is our fixed asset requirement now? How does this affect our previous pro forma statements?
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Changing operating capacity Recent (Actual) Financial Statements: come statement alance sheet Income statement Balance sheet Sales $1,000 CA $100 CL $ 50 CoGS/other exp. 860 FA 400 LTD 150 Depreciation 40 Equity 300 EBIT 100 Total $500 $500 Interest 0 Taxable Income 100 xes (35%) 5 Note: For simplicity, let’s assume interest free debt Taxes (35%) 35 Net Income $ 65 Sales are projected to rise by 20%. Let’s assume non depreciation costs and current assets grow at the same rate as sales, the depreciation expense is always 10% of fixed assets, and that 50% of net income must always be paid out in dividends. Let’s now suppose that current capacity use is 70%, and that the firm anticipates creasing operating capacity to 80% increasing operating capacity to 80%. What is the fixed assets requirement now? How does this affect the external financing needed ( EFN )?
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Summary of steps for pro formas 1. Forecast sales and costs and determine income statement –At least up to EBIT 2. Forecast the LHS of the balance sheet and determine TA Forecast as much of the RHS of Balance Sheet as possible 3. Forecast as much of the RHS of Balance Sheet as possible –If available, use constraints to find CL and LTD –Find ARE from income statement if possible 4. Substitute everything you know into the Balance sheet identity –Solve for the plug –Complete income statement (if needed) 5. Stick in values for D and E into the balance sheet
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Financial policy and growth Under Percentage of Sales Approach:
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MGMT310_lecture5_6 - Lectures Lectures5and6...

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