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Key Ratios: Balance Sheet (2002) in Million of Dollars

The document discusses financial planning and forecasting for a company. It provides historical financial statements from 2002 and forecasts the income statement, balance sheet, and key ratios for 2003. It calculates the additional financing needed of $179 million and how this will be obtained through new notes payable and long-term debt. The forecasted cash flow for 2003 is estimated to be negative $150 million due to investment in operating capital.

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10 views

Key Ratios: Balance Sheet (2002) in Million of Dollars

The document discusses financial planning and forecasting for a company. It provides historical financial statements from 2002 and forecasts the income statement, balance sheet, and key ratios for 2003. It calculates the additional financing needed of $179 million and how this will be obtained through new notes payable and long-term debt. The forecasted cash flow for 2003 is estimated to be negative $150 million due to investment in operating capital.

Uploaded by

melkamubolka280
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 5

CHAPTER 5

FINANCIAL PLANNING AND FORECASTING


 forecasting sales.
 projecting the assets and internally
generated funds.
 projecting out side funds needed.
 Desiding how to raise funds.

 Balance sheet (2002)


In million of dollars

Cash & sec. $20 acts. pay. & accruals $100


accounts rec. $240 note payable $100
------- ------
inventories $240 total CL $200
total AL $500 L-T debt 100
common stock 500
net fixed assets 500 retained earnings 200
------- --------
total assets $1000 total claims $1000

 Income statement(2002)
in millions of dollars

Sales $2000
Less: var.costs(60%) 1200
Fixed costs 700
--------
EBIT $100
Interest 16
------
EBIT $84
Taxes(40%) 33
Net income $50
--------
Dividends $15.12
Add: RE $35.28

 Key ratios
NWC Industry Condition

1
BEP 10% 20% poor
Profit margin 2.52% 4% poor
ROE 7.20% 15.60% poor
DSO 43.8 days 32 days poor
Inv.turnover 8.33x 11x poor
F.A turnover 4x 5x poor
T.A turnover 2x 2.5x poor
Debt/assets 30% 36% good
TIE 6.25x 9.4x poor
Current ratio 2.5x 3x poor
Payout ratio 30% 30% o.k

 Forecasting income statement(2003)


2002 2003
forecast
Sales $2000 1.25 $2500
Less: VC 1200 0.60 1500
FC 700 0.35 875
EBIT $100 $125
Interest 16 16
EBIT $84 $109
Taxes(40%) 34 44
Net income $50 $65
Dividend(30%) $15 $19
Add: RE $35 $46
 Forecasted balance sheet(2003) assets
2002
Cash $20 0.01 $25
Accts.rec. 240 0.12 300
Inventorie 240 0.12 300
Total CA $500 $625
Net FA 500 0.25 625
Total assets $1000 $1250
 Forecasted balance sheet(2003) liabilities & equity
2002
A/P accruals $100 0.05 $125
Note payable 100 100
Total CL $200 $225
L-T debt 100 100
Common stock 500 500
Ret. Earnings 200 246
Total claims $1000 $1071

 What is the additional financing


Needed (AFN)?
Required increase in assets = $250
Spontaneous increase in liability =$25
Increase in retained earnings =$46
Total AFN =$179

2
NWC must have the assets to generate forecasted sales.
The balance sheet must be balance, so we must raise
$179 million externally.
 How will the AFN be financed
Additional N/P
0.5($179)=$89.50
Additional L-T debt
0.5($179)=$89.50
But this financed will add to interest expense,
Which will lower NI & retained earnings.
 Forecasted balance sheet(2003) assets-2nd pass
2003 1st pass
Cash $25 --- $25
Accts, rec. 300 --- 300
Inventories 300 --- 300
Total CA $625 $625
Net FA 625 --- 625
Total assets $1250 $1250
 Forecasted balance sheet(2003)
Liability and equity--2nd pass
2003 1st pass
A/P accruals $125 ---- $125
Note payable 100 +89.5 190
Total CL $225 $135
L-T debt 100 +89.5 189
Common stock 500 ---- 500
Retained earnings 246 ---- 246
Total claims $1071 $1250
 Why do the AFN Equation & financial statement
Method have different result?
Equation method is assumes aconstant profit margin,
Aconstant dividend payout and aconstant capital structure.
Financial statement method is more flexible, it allows different items tw grow at different rate.
 Forecasted ratios(2003)
2002 2003(E) Industry condition
BEP 10% 10% 20% poor
Profıt margin 2.52% 2.62% 4% poor
ROE 7.20% 8.77% 15.60% poor
DSO(days) 43.80 days 43.80 days 32.00 days poor
Inv.turnover 8.33x 8.33x 11x poor
F.A turnover 4.00x 4.00x 5x poor
T.A turnover 2.00x 2.00x 2.5x poor
D/A ratio 30% 40.34% 36% poor
TIE 6.25x 7.81x 9.40x poor
Current ratio 2.50x 1.99x 3x poor
Payout ratio 30% 30% 30% o.k
 Net investment in operating capital
OC2003=NOWC+Net FA
= $625--$125+$625
OC2002=$900
Net investment in OC = $1125--$900

3
=$225
 How much free cash flow is expected be
generated in 2003?
FCF= NOPAT--Net investment in OC
=EBIT(1--T)--Net investment in OC
=$125(0.6)--$225
=$75--$225
=--$150
 How would excess capacity situation affect the 2003 AFN?
The projected increase in fixed assets was $125,
The AFN would decrease by $125.
AFN = $179--$125=$54
If sales increased to 3000 instead, what would be the fi ed asset requirement?
Tarqet ratio = FA/caxacity sales
= $500/$2667
=18.75%
FA for sales up to $2667, but FA fore anothor $333 of sales
FA = 0.18775($333)
= 62.4
 Forecasted ratios(2003) with projected
2003 sales of $2500
% of 2002 capacity
100% 75% industry
BEP 10% 11.11% 20%
Profit margin 2.62% 2.62% 4%
ROE 8.77% 8.77% 15.60%
DSO(days) 43.80 days 43.80 days 32.00 days
Inv. turnover 8.33x 8.33x 11.00x
F.A turnover 4.00x 5.00x 5.00x
T.A turnover 2.00x 2.22x 2.50x
D/A ratio 40.34% 33.71% 36%
TIE 7.81x 7.81x 9.40x
Current ratio 1.99x 2.48x 3.00x

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