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FIN+4414+-+Financial+Forecasting+-+Chapter+14-1

# FIN+4414+-+Financial+Forecasting+-+Chapter+14-1 - Financial...

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Financial Forecasting

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Equation Method AFN = (A * /S 0 ) S - (L * /S 0 ) 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 Interest -\$200 EBT \$1,800 Taxes -\$900 50% EBT Net Income \$900 18% Sales Dividends \$400 44% NI To Retained Earnings \$500 Income Statement Year 0 Item Percent

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Year 0 Starting Point Cash \$200 0.04 Sales Receivables \$1,500 0.30 Sales Inventory \$3,300 0.66 Sales Fixed Assets \$2,000 0.40 Sales Total Assets \$7,000 1.40 Sales Item Assets Year 0 Percent
Year 0 Starting Point Accounts Payable \$500 0.10 Sales Notes Payable \$1,000 Accruals \$500 0.10 Sales Long-term Debt \$1,000 Common Stock \$800 Retained Earnings \$3,200 Total Liabilities & Equity \$7,000 Item Percent Liabilities & Equity Year 0

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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. Profit margin will remain at 18%. Dividend payout will remain at 44.44%.

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Equation Method A * /S 0 = \$7,000/\$5,000 = 1.40 L * /S 0 = (\$500 + \$500)/\$5,000 = .20 M = \$900/\$5,000 = .18 d = \$400/\$900 = .4444
Equation Method AFN = (1.40)(\$2,000) - (0.20)(\$2,000) - (0.18)(\$7,000)(1 - 0.4444) AFN = \$2,800 - \$400 - \$700 AFN = \$1,700

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Equation Method Problems :
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