MANAGEMENTCONSULTANCY - Solutions Manual CHAPTER14 FINANCIAL FORECASTING I Questions The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the associated financing that will be required Furthermore, one can track actual events against the projections Bankers and other lenders also use these financial statements as a guide in credit decisions The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid To the extent collections not cover purchasing costs and other financial requirements, the firm must look to borrowing to cover the deficit Rapid growth in sales and profits is often associated with rapid growth in asset commitment A P100,000 increase in sales may occasion a P50,000 increase in assets, with perhaps only P10,000 of the new financing coming from profits It is very seldom that incremental profits from sales expansion can meet new financing needs The percent-of-sales forecast is only as goods as the functional relationship of assets and liabilities to sales To the extent that past relationships accurately depict the future, the percent-of-sales method will give values that reasonably represent the values derived through the pro-forma statements and the cash budget II Multiple Choice C A C A A 10 B A C B A 11 12 13 14 15 III Problems 14-1 D C B C A 16 17 18 19 B A A D Chapter14 Financial Forecasting PROBLEM (ETC ELECTRONICS COMPANY) Cash Receipts Schedule + + + Sales Cash Sales (10%) Credit Sales (90%) Collections (month after sale) 20% Collections (second month after sale) 80% April P320,000 32,000 288,000 May P300,000 30,000 270,000 June P275,000 27,500 247,500 July P275,000 27,500 247,500 Aug P290,000 29,000 261,000 Sept P330,000 33,000 297,000 57,600 54,000 49,500 49,500 52,200 230,400 216,000 198,000 198,000 P311,900 P293,000 P276,500 P238,200 Total Cash Receipts Cash Payments Schedule Purchases Payments (month after purchase - 40%) Payments (second month after purchase 60%) Labor Expense (10% of sales) Overhead Interest Payments Cash Dividend Taxes Capital Outlay Total Cash Payments April P130,000 May P120,000 June P120,000 July P180,000 Aug P200,000 Sept P170,000 52,000 48,000 48,000 72,000 80,000 78,000 72,000 72,000 108,000 27,500 12,000 30,000 50,000 25,000 27,500 12,000 29,000 12,000 33,000 12,000 30,000 P270,500 P159,500 P185,000 25,000 300,000 P588,000 Cash Budget Cash Receipts Cash Payments Net Cash Flow Beginning Cash Balance Cumulative Cash Balance Monthly Borrowing or (Repayment) Cumulative Loan Balance Marketable Securities Purchased (Sold) Cumulative Marketable Securities Ending Cash Balance * Cumulative Marketable Sec (Aug.) Cumulative Cash Balance (Sept.) Required (ending) Cash Balance Monthly Borrowing June P311,900 270,500 41,400 20,000 61,400 11,400 11,400 50,000 P236,400 - 254,800 - 10,000 - P28,400 14-2 July P293,000 159,500 133,500 50,000 183,500 133,500 -144,900 50,000 August P276,500 185,000 91,500 50,000 141,500 91,500 -236,400 50,000 September P283,200 588,000 (304,800) 50,000 (254,800) *28,400 28,400 (236,400) 10,000 Financial Forecasting Chapter14 PROBLEM (ODETTE ELECTRONICS) Required New Funds (S) = S = (10%) (P100 mil.) S = P10,000,000 A S (S) PS2 (1 D) L S (P10,000,000) RNF (millions) = (P10,000,000) 07 (P110,000,000) (1 40) RNF = 85 25 85(P10,000,000) 25(P10,000,000) 07(P110,000,000) (.60) 100 100 = P8,500,000 P2,500,000 P4,620,000 = P1,380,000 PROBLEM (TESS’ SHOPS, INC.) a) Required New Funds (S) = (S) PS2 (1 D) S = 15% x P300,000,000 = P45,000,000 RNF = RNF (P45,000,000) A S (P345,000,000) (1 25) (P45,000,000) 08 L S = 240 120 80(P45,000,000) 40(P45,000,000) 08 300 300 (P345,000,000) (.75) = P36,000,000 P18,000,000 P20,700,000 = (P2,700,000) 14-3 Chapter14 Financial Forecasting A negative figure for required new funds indicates that an excess of funds (P2.7 mil.) is available for new investment No external funds are needed b) RNF = P36,000,000 P18,000,000 095(P345,000,000) x (1 5) = P36,000,000 P18,000,000 P16,387,500 = P1,612,500 external funds required The net profit margin increased slightly, from 8% to 9.5%, which decreases the need for external funding The dividend payout ratio increased tremendously, however, from 25% to 50%, necessitating more external financing The effect of the dividend policy change overpowered the effect of the net profit margin change 14-4 ... 50,000 P236,400 - 254,800 - 10,000 - P28,400 1 4- 2 July P293,000 159,500 133,500 50,000 183,500 133,500 -1 44 ,900 50,000 August P276,500 185,000 91,500 50,000 141 ,500 91,500 -2 36,400 50,000 September... 08 300 300 (P345,000,000) (.75) = P36,000,000 P18,000,000 P20,700,000 = (P2,700,000) 1 4- 3 Chapter 14 Financial Forecasting A negative figure for required new funds indicates that an excess... P283,200 588,000 (304,800) 50,000 (254,800) *28,400 28,400 (236,400) 10,000 Financial Forecasting Chapter 14 PROBLEM (ODETTE ELECTRONICS) Required New Funds (S) = S = (10%) (P100 mil.) S = P10,000,000