Chapter 17 Financial Planning and Forecasting Forecasting Sales Projecting the Assets and Internally Generated Funds Projecting Outside Funds Needed Deciding How to Raise Funds 17-1 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Preliminary Financial Forecast: Balance Sheets (Assets) Cash and equivalents Accounts receivable Inventories Total current assets Net fixed assets Total assets 2012 $ 20 240 240 $ 500 500 $1,000 2013E $ 25 300 300 $ 625 625 $1,250 17-2 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity) A/P & accrued liabilities Notes payable Total current liabilities Long-term debt Common stock Retained earnings Total liabilities & equity 2012 $ 100 100 $ 200 100 500 200 $1,000 2013E $ 125 190 $ 315 190 500 245 $1,250 17-3 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Preliminary Financial Forecast: Income Statements Sales Variable costs Fixed costs EBIT Interest EBT Taxes (40%) Net income Dividends (30% of NI) Addition to retained earnings 2012 $2,000.0 1,200.0 700.0 $ 100.0 16.0 $ 84.0 33.6 $ 50.4 2013E $2,500.0 1,500.0 875.0 $ 125.0 16.0 $ 109.0 43.6 $ 65.4 $15.12 $35.28 $19.62 $45.78 17-4 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Key Financial Ratios 2012 Basic earning power Profit margin Return on equity Days sales outstanding Inventory turnover Fixed assets turnover Total assets turnover Debt/Assets 10.00% 2.52% 2013E 10.00% 2.62% Ind Avg 20.00% 4.00% 7.20% 8.77% 15.60% 43.8 days 43.8 days 32.0 days 8.33x 8.33x 11.00x 4.00x 4.00x 5.00x 2.00x 2.00x 2.50x Comment Poor Poor Poor Poor Poor Poor Poor OK 30.00% 40.40% 36.00% 17-5 © 2013 Cengage Times Learning interest All Rights Reserved earnedMay not be scanned, 6.25x copied, or duplicated, 7.81x or posted to a publicly 9.40x accessible website, Poorin whole or in part Key Assumptions in Preliminary Financial Forecast for NWC • • • Operating at full capacity in 2012 • 2012 profit margin (2.52%) and payout (30%) will be maintained • Sales are expected to increase by $500 million (%∆S = 25%) Each type of asset grows proportionally with sales Payables and accruals grow proportionally with sales 17-6 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Determining Additional Funds Needed Using the AFN Equation AFN = (A0*/S0)∆S – (L0*/S0)∆S – M(S1)(1 – Payout) = ($1,000/$2,000)($500) – ($100/$2,000)($500) – 0.0252($2,500)(0.7) = $180.9 million 17-7 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Management’s Review of the Financial Forecast • Consultation with some key managers has yielded the following revisions: – Firm expects customers to pay quicker next year, – – thus reducing DSO to 34 days without affecting sales A new facility will boost the firm’s net fixed assets to $700 million New inventory system to increase the firm’s inventory turnover to 10x, without affecting sales 17-8 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Management’s Review of the Financial Forecast • These changes will lead to adjustments in the firm’s assets and will have no effect on the firm’s liabilities and equity section of the balance sheet or its income statement 17-9 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Revised (Final) Financial Forecast: Balance Sheets (Assets) Cash and equivalents Accounts receivable Inventories Total current assets Net fixed assets Total assets 2012 $ 20 240 240 $ 500 500 $1,000 2013F $ 67 233 250 $ 550 700 $1,250 17-10 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Key Financial Ratios: Final Forecast Basic earning power Profit margin Return on equity Days sales outstanding Inventory turnover Fixed assets turnover Total assets turnover Debt/Assets Times interest earned Current ratio Payout ratio 2012 10.00% 2.52% 7.20% 2013F 10.00% 2.62% 8.77% Ind Avg 20.00% 4.00% 15.60% Comment Poor Poor Poor 43.8 days 8.33x 4.00x 2.00x 30.00% 6.25x 2.50x 30.00% 34.0 days 10.00x 3.57x 2.00x 40.40% 7.81x 1.98x 30.00% 32.0 days 11.00x 5.00x 2.50x 36.00% 9.40x 3.00x 30.00% OK OK Poor OK Poor Poor Poor OK 17-11 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part What was the net investment in capital? Capital2013 = NOWC + NetFA = $625 − ($315 − $190) + $625 = $625 − $125 + $625 = $1,125 Capital2012 = $900 Net investment in capital = $1,125 − $900 = $225 17-12 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part How much free cash flow is expected to be generated in 2013? FCF = EBIT(1 – T) – Net investment in capital = $125(0.6) – $225 = $75 – $225 = -$150 17-13 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Suppose Fixed Assets Had Been Operating at Only 85% of Capacity in 2012 • The maximum amount of sales that can be supported by the 2012 level of assets is: Capacity sales = Actual sales/ % of capacity = $2,000/0.85 = $2,353 • 2013 forecast sales exceed the capacity sales, so new fixed assets are required to support 2013 sales 17-14 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part How can excess capacity affect the forecasted ratios? • Sales wouldn’t change but assets would be lower, so turnovers would improve • Less new debt, hence lower interest and higher profits • EPS, ROE, debt ratio, and TIE would improve 17-15 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part How would the following items affect the AFN? • Higher dividend payout ratio? • Higher profit margin? • • – Increase AFN: Less retained earnings – Decrease AFN: Higher profits, more retained earnings Higher capital intensity ratio? – Increase AFN: Need more assets for a given level of sales Pay suppliers in 60 days, rather than 30 days? – Decrease AFN: Trade creditors supply more capital (i.e., L0*/S0 increases) 17-16 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part [...]... investment in capital? Capital2013 = NOWC + NetFA = $625 − ($315 − $190) + $625 = $625 − $125 + $625 = $1,125 Capital2012 = $900 Net investment in capital = $1,125 − $900 = $225 17-12 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part How much free cash flow is expected to be generated in 2013? FCF = EBIT(1 –... earned Current ratio Payout ratio 2012 10.00% 2.52% 7.20% 2013F 10.00% 2.62% 8.77% Ind Avg 20.00% 4.00% 15.60% Comment Poor Poor Poor 43.8 days 8.33x 4.00x 2.00x 30.00% 6.25x 2.50x 30.00% 34.0 days 10.00x 3.57x 2.00x 40.40% 7.81x 1.98x 30.00% 32.0 days 11.00x 5.00x 2.50x 36.00% 9.40x 3.00x 30.00% OK OK Poor OK Poor Poor Poor OK 17-11 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied,... -$150 17-13 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part Suppose Fixed Assets Had Been Operating at Only 85% of Capacity in 2012 • The maximum amount of sales that can be supported by the 2012 level of assets is: Capacity sales = Actual sales/ % of capacity = $2,000/0.85 = $2,353 • 2013 forecast... the 2012 level of assets is: Capacity sales = Actual sales/ % of capacity = $2,000/0.85 = $2,353 • 2013 forecast sales exceed the capacity sales, so new fixed assets are required to support 2013 sales 17-14 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part How can excess capacity affect the forecasted... forecasted ratios? • Sales wouldn’t change but assets would be lower, so turnovers would improve • Less new debt, hence lower interest and higher profits • EPS, ROE, debt ratio, and TIE would improve 17-15 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part How would the following items affect the AFN? • Higher... ratio? – Increase AFN: Need more assets for a given level of sales Pay suppliers in 60 days, rather than 30 days? – Decrease AFN: Trade creditors supply more capital (i.e., L0*/S0 increases) 17-16 © 2013 Cengage Learning All Rights Reserved May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part