Forecasting - handout

Forecasting - handout - Ch. 4: Financial Forecasting, Ch....

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Ch. 4: Financial Forecasting, Ch. Planning and Budgeting Mind Map Mind s Why?: Financial statements are backwardslooking. As analysts/managers, we are really interested in what will happen in the future. Hence, we want to be able to make fundamental assumptions about the future progress of the firm and then forecast future results. Our goal is to understand the possible implications of today’s decisions on tomorrow’s performance. Mind Map Mind s Learning objective: – Create pro forma income statements and balance sheets using percent of sales forecasting – Identify the key variables in the forecasting process and the key limitations – Understand the key interactions in the planning process – Estimate a cash budget in good form Mind Map Mind s Key words/concepts: – – – – – – Percent of sales forecasting Discretionary financing need (DFN) Spontaneous and non-spontaneous accounts RE forecasting Capacity, payout ratio, plowback ratio Sustainable growth rate and the duPont equation – Cash budgets Financial Forecasting Financial s 1) Project sales revenues and expenses. s 2) Estimate current assets and fixed assets necessary to support projected sales. s 3) Analyze financing/ calculate DFN sPercent of sales forecast So, What’s the Point??? So, s Growth requires increased investment – But how much additional financing is needed? s The Percent of Sales forecast allows us to determine the “Discretionary Financing Needed” (DFN) s AKA: External Financing Needed (EFN) Are we making a detailed road map of the firm’s future??? map Forecasting the Financial Statements Statements s Q: What type of accounts vary with sales? s A: many asset accounts and some current liability accounts s Spontaneous vs. non-spontaneous s Special cases: interest and Retained earnings Spontaneous Accounts Spontaneous Most Current Assets (usual assumption) s Accounts Payable s Accruals (accrued wages, etc) s What about Fixed assets? s – Sometimes – you must read problem statement carefully Non-Spontaneous Accounts Non-Spontaneous s Notes Payable Financing s Long-term Liability accounts Accounts s Common Stock s Interest (see next slide) s Retained earnings (see next slide) “Special Case” Line Items s Interest: assume no change unless otherwise directed s RE: New RE = Old RE + NI – Div s WRITE THIS DOWN!! s RE must be independently forecast Percent of Sales Method Percent s Suppose this year’s sales will total $32 million. s Next year, we forecast sales of Big tion! $40 million. ssu m p a s Net income should be 5% of sales (i.e., net margin = NI/Sales = 5%). s Dividends = 50% of earnings. This year This Assets Current Assets Fixed Assets Total Assets Total Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Total Common Stock Retained Earnings Equity Equity Total Liab & Equity Total % of $32m of ($8M / $32M) $8m $16m $24m $4m $4m $1m $6m 25% 50% 12.5% 12.5% n/a n/a $15m $7m $2m n/a $9m $24m Next year Next Assets Projected sales Projected Current Assets ($40MM) x .25 = Fixed Assets Total Assets Total Liab. and Equity Accounts Payable $5m Accrued Expenses $5m Notes Payable $1m Long Term Debt $6m Total Liabilities Total Common Stock $7m ??? Retained Earnings Equity Equity Total Liab & Equity Total $10m $20m $30m % of $40m of 25% 50% 12.5% 12.5% n/a n/a $17m n/a Predicting Retained Earnings: Predicting s Next year’s projected retained earnings = last year’s $2 million, plus: projected sales x net income x sales $40 million x Last year’s RE + (1 .05 Increase in RE x cash dividends - net income ) (1 - .50) = projected RE => $2 million + $1 million = $3million Next year Next Assets Current Assets Fixed Assets Total Assets Total Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Total Common Stock Retained Earnings Equity Equity Total Liab & Equity Total $10m $20m $30m $5m $5m $1m $6m % of $40m of 25% 50% 12.5% 12.5% n/a n/a $17m $7m $3m n/a $10m $27m Next year Next Assets Current Assets Fixed Assets Total Assets Total Liab. and Equity Accounts Payable Accrued Expenses Notes Payable Long Term Debt Total Liabilities Total Common Stock Retained Earnings Equity Equity Total Liab & Equity Total $10m $20m $30m $5m $5m $1m $6m % of $40m of 25% 50% 12.5% How much 12.5% Discretionary n/a or External n/a $17m $7m $3m $10m $27m Financing n/a will we Need? Predicting Discretionary Financing Predicting Discretionary Financing Predicting Needs Needs Needs Needs Discretionary Financing Needed = projected total total assets assets projected total liabilities projected owners’ equity $30 million - $17 million - $10 million = $3 million in discretionary financing $3 HOW COULD THIS FIRM REDUCE DFN??? Before the Exam… Before s Sustainable growth s duPont decomposition (actually in Ch.3) s Budgeting s PRACTICE FORECASTING!!! ...
View Full Document

Ask a homework question - tutors are online