Financial forecasting Questions

1. Explain what the Sustainable Growth Rate. With examples explain how it is related to
plowback ratio.

2. Why do you think most long-term financial planning begins with a sales forecast?

3. Using the AFN formula approach, calculate the total assets of Harmon Photo Company
given the following information:
Sales this year TZS 3,000, 000
sales increase projected for next year 20%
NI- this year TZS 250,000
Dividend payout ratio 40 %
Projected excess funds available next year TZS 100,000
Accounts payable TZS 600,000
Notes payable TZS 100,000
Accrued wages and taxes TZS 200,000
Except for the accounts noted, there were no other current liabilities. Assume that the firm’s profit
margin remains constant and that the company is operating at full capacity.

4. Archer Electronics Company’s actual sales and purchases for April and February are
shown here along with forecasted sales and purchases for March through June figures in
Tshs million).

Sales Purchases
January (actual) 32.00 13.00
February (actual) 30.00 12.00
March (forecast) 27.50 12.00
April (forecast) 27.50 18.00
May (forecast) 29.00 20.00
June (forecast) 33.00 17.00

The company makes 10 percent of its sales for cash and 90 percent on credit. Of the credit
sales, 20 percent are collected in the month after the sale and 80 percent are collected two
months after. Archer pays for 40 percent of its purchases in the month after purchase and 60
percent two months after. Labour expense equals 10 percent of the current month’s sales.
Overhead expense equals Tshs 1,200,000 per month. Interest payments of Tshs 3,000,000 are
due in March and June. There is a scheduled capital outlay of Tshs 30 million in June. Archer
Electronics’ ending cash balance in February is Tshs 2 million. The minimum desired cash
balance is Tshs 1 million. Prepare a schedule of monthly cash receipts, monthly cash payments,
and a complete monthly cash budget with borrowing and repayments for March through June.
The maximum desired cash balance is Tshs 5 million. Excess cash (above Tshs 5 million) is used
to buy marketable securities. Marketable securities are sold before borrowing funds in case of
a cash shortfall (less than Tshs 1 million).
 5. Conn Man’s Shops Ltd had sales of Tshs 300 million last year. The business has a steady
net profit margin of 8 percent and a dividend pay-out ratio of 25 percent. The
balance sheet for the end of last year is shown below;
Balance Sheet End of Year (in Tshs million)
Assets Liabilities and Stockholders’ Equity
Cash 20 Accounts payable 70
Accounts receivable 25 Accrued expenses 20
Inventory 75 Other payables 30
Plant and equipment 120 Common stock 40
Retained earnings 80
Total liabilities and
Total assets 240 240

The firm’s marketing staff has told the Chief Executive that in the coming year there will be a
large increase in the demand for the company’s products. A sales increase of 15 percent is
forecast for the company. All balance sheet items are expected to maintain the same percent-
of-sales relationships as last year, except for common stock shares outstanding, and retained
earnings will change as dictated by the profits and dividend policy of the firm. (Remember the
net profit margin is 8 percent).

a. Will external financing be required for the company during the coming year?
b. What would be the need for external financing if the net profit margin went up to
9.5 percent and the dividend pay-out ratio was increased to 50 percent? Explain.

6. The Tapley Company is trying to determine an acceptable growth rate in sales. While
the firm wants to expand, it does not want to use any external funds to support such
expansion due to the particularly high interest rates in the market now. Having
gathered the following data for the firm,

• Capital intensity ratio = 1.2.

• Profit margin = 10%.
• Dividend payout ratio = 50%.
• Current sales = Tzs100, 000.
• Spontaneous liabilities = Tzs10, 000.

What is the maximum growth rate it can sustain without requiring additional funds?

7. IGN Ltd is thinking of purchasing a new machine. With this new machine, the company
expects sales to increase from Tshs 8,000,000 to Tshs 10,000,000. The company knows
that its assets, accounts payable and accrued expenses vary directly with sales. The
company’s profit margin on sales is 8 percent, and the company plans to pay 40
percent of its after-tax earnings in dividends, The Company’s current balance sheet is
given below.
 Balance Sheet TZS
Current assets 3,000,000
Fixed assets 12,000,000
Total assets 15,000,000
Accounts payable 4,000,000
Accrued expenses 1,000,000
Long-term debt 3,000,000
Common stock 2,000,000
Retained earnings 5,000,000
Total liabilities and net worth 15,000,000

a. Use the formula to determine the external funds needed

b. Prepare a pro forma balance sheet and use it to determine the amount of external
funds needed.
c. Determine, using the formula, the external funds needed under each of the following
conditions:

i. The profit margin rises from 8 percent to 10 percent.

ii. The profit margin is 8 percent, but the dividend pay-out ratio is reduced
from 40% to 20%

d. Comment on the results from part (c).

8. Your firm has Tzs 70 million in equity and Tzs 30 million in debt and forecasts Tzs 14
million in net income for the year. It currently pays dividends equal to 20% of its net
income. You are analysing a potential change in pay-out policy: an increase in
dividends to 30% of net income. How would this change affect your sustainable growth
rate? Explain the results
9. Gourmet Kitchens Incorporated recently reported the following 2002 income statement
(in millions of dollars):
Sales $1,225
Operating costs 875
EBIT $ 350
Interest 70
EBT $ 280
Taxes (40%) 112
Net income $ 168

Dividends (33.333%) $ 56
In addition to retained earnings $ 112

The company is forecasting a 30 percent increase in 2003 sales, and it expects that its year-
end operating costs will equal 75 percent of sales. Gourmet’s tax rate, interest expense, and
dividend pay-out ratio are all expected to remain constant.

a. What is Gourmet’s projected 2003 net income (in millions of dollars)?

b. What is the expected growth rate in Gourmet’s dividends?