fm14 12 - decide how to raise funds, and (6) see effects of...

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Mini Case: 14 - 12 C. Key Ratios Sec Industry Profit Margin 2.70 4.00 Return On Equity 7.71 15.60 Days Sales Outstanding (365 Days) 43.80 Days 32.00 Days Inventory Turnover 8.33 × 11.00 × Fixed Assets Turnover 4.00 5.00 Debt/Assets 30.00% 36.00% Times Interest Earned 10.00 × 9.40 × Current Ratio 2.50 3.00 Return On Invested Capital (NOPAT/Operating Capital) 6.67% 14.00% a. Describe three ways that pro forma statements are used in financial planning. Answer: Three important uses: (1) forecast the amount of external financing that will be required, (2) evaluate the impact that changes in the operating plan have on the value of the firm, (3) set appropriate targets for compensation plans b. Explain the steps in financial forecasting. Answer: (1) forecast sales, (2) project the assets needed to support sales, (3) project internally generated funds, (4) project outside funds needed, (5)
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Unformatted text preview: decide how to raise funds, and (6) see effects of plan on ratios and stock price . c. Assume (1) that SEC was operating at full capacity in 2007 with respect to all assets, (2) that all assets must grow proportionally with sales, (3) that accounts payable and accruals will also grow in proportion to sales, and (4) that the 2007 profit margin and dividend payout will be maintained. Under these conditions, what will the companys financial requirements be for the coming year? Use the AFN equation to answer this question. Answer: SEC will need $184.5 million. Here is the AFN equation: AFN = (A * /S ) S - (L * /S ) S - M(S 1 )(RR) = (A * /S )(g)(S ) - (L * /S )(g)(S ) - M(S )(1 + g)(1 - payout) = ($1,000/$2,000)(0.25)($2,000) - ($100/$2,000)(0.25)($2,000) - 0.0270($2,000)(1.25)(0.6) = $250 - $25 - $40.5 = $184.5 million....
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