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Financial Forecast

Fm2

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24 views

Financial Forecast

Fm2

Uploaded by

jundiahmedin46
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Financial Management II

CHAPTER – 3

Financial Forecasting
Overview of financial forecasting
Financial forecasting: is the process of estimating/predicting the
future financial performance of a business or organization.

• It helps to formulate the way in which financial goals are to be


achieved
Forecasting growth rates
• The growth rate of a company is a measure of how quickly it is
expanding its operations and increasing its financial performance.

• It is typically expressed as a percentage change in a company's key


metrics, such as revenue, earnings.
• The two growth rates that are particularly useful in long-range
planning.
1. Internal growth rate
2. Sustainable growth rate
1. Internal growth rate

• is the maximum growth rate that can be achieved with no external


financing of any kind.

• Internal growth rate = ROA × b


1 − ROA × b

E.g. Hoffman Company, net income was $66 and total assets were
$500. Of the $66 net income, $44 was retained. With these numbers, we
can calculate the internal growth rate?
2. Sustainable Growth Rate
• Is the maximum growth rate a firm can achieve with no external equity
financing while it maintains a constant debt-equity ratio.

• This rate is commonly called the sustainable growth rate because it is


the maximum rate of growth a firm can maintain without increasing its
financial leverage.

Sustainable growth rate = ROE ×b


1 − ROE ×b
E.g. Hoffman Company, net income was $66 and total equity was $250
The plowback ratio, b, is still 2/3, So Calculate the sustainable growth
rate?
Forecasting External Financing needs (EFN)
• EFN (External Finance Need): is the amount of fiancé the business
requires from outside sources to maintain their expected performance.

• External source of finance includes:


•Bank loan
•Issuing debt securities
•Issuing ´equity securities
EFN
 External Financing Needed =
Change in Assets - Change in C.Liabilities – Retained Earnings
 EFN = (A/S) x (Δ Sales) - (L/S) x (Δ Sales) - (PM x FS x (1-d))
Where,
 A / S: Assets that change given a change in sales, expressed as a percentage of sales.
 Δ = Symbol for Change
 Δ Sales: Change in sales between the last reporting period and the forecasted sales.
 L / S: Liabilities that change given a change in sales, expressed as a percentage of sales.
 PM: Profit Margin on Sales; i.e. net income / sales.
 FS: Forecasted Sales
 d: dividend payout percent
 (1 - d): Percent of earnings retained after paying out dividends; d is the dividend payout
ratio.
 Example:
Calculate EFN of ABC Company based on the following given
information:

 Total Assets last year = $ 6.5 Million


 Total Sales last year = $ 21.0 Million
 Total Current Liabilities last year = $ 2.1 Million
 Profit Margin = 4% of sales
 Forecasted Sales = $ 24.5 Million
 Dividend Payout Ratio or d = 60%
A / S = $ 6.5 / $ 21.0 = 31%
L / S = $ 2.1 / $ 21.0 = 10%
Change in Sales or Δ Sales = $ 24.5 - $ 21.0 = $ 3.5

 EFN = (.31 x $ 3.5) - (.10 x $ 3.5) - ((.04 x $ 24.5) x (1 - .60))


 EFN = $ 1.085 - $ .35 - ($ .98 x .40)
 EFN = $ .735 - $ .392
 EFN = $ .343
To be continued …………..

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