4-Working Capital Management Forecasting

4-Working Capital Management Forecasting - 1 Financial...

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Unformatted text preview: 1 Financial management concepts Financial Planning and Forecasting Financial Statements 2 Topics in Chapter n Financial planning n Additional Funds Needed (AFN) formula n Forecasted financial statements n Sales forecasts n Percent of sales method 3 Financial Planning and Pro Forma Statements n Three important uses: n Forecast the amount of external financing that will be required n Evaluate the impact that changes in the operating plan have on the value of the firm n Set appropriate targets for compensation plans 4 Steps in Financial Forecasting n Forecast sales n Project the assets needed to support sales n Project internally generated funds n Project outside funds needed n Decide how to raise funds n See effects of plan on ratios and stock price 5 2008 Balance Sheet (Millions of $) Cash & sec. $ 20 Accts. pay. & accruals $ 100 Accounts rec. 240 Notes payable 100 Inventories 240 Total CL $ 200 Total CA $ 500 L-T debt 100 Common stk 500 Net fixed assets Retained earnings 200 Total assets $1,000 Total claims $1,000 500 6 2008 Income Statement (Millions of $) Sales $2,000.00 Less: COGS (60%) 1,200.00 SGA costs 700.00 EBIT $ 100.00 Interest 10.00 EBT $ 90.00 Taxes (40%) 36.00 Net income $ 54.00 Dividends (40%) $21.60 Addn to RE $32.40 7 AFN (Additional Funds Needed) Formula: Key Assumptions n Operating at full capacity in 2008. n Each type of asset grows proportionally with sales. n Payables and accruals grow proportionally with sales. n 2008 profit margin ($54/$2,000 = 2.70%) and payout (40%) will be maintained. n Sales are expected to increase by $500 million. 8 Definitions of Variables in AFN n A*/S0: assets required to support sales; called capital intensity ratio. n S: increase in sales. n L*/S0: spontaneous liabilities ratio n M: profit margin (Net income/sales) n RR: retention ratio; percent of net income not paid as dividend. 9 Assets Sales 1,000 2,000 1,250 2,500 A*/S0 = $1,000/$2,000 = 0.5 = $1,250/$2,500....
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4-Working Capital Management Forecasting - 1 Financial...

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