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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
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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
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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.
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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
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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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