Ch.12 - 13ed Fin Planning & ForecastingMaster

8/10/2019 Ch.12 - 13ed Fin Planning & ForecastingMaster

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CHAPTER 12

Financial Planning and

Forecasting FinancialStatements


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Topics in ChapterFinancial planningAdditional funds needed (AFNe!uationForecasted "nancial statements

Sales forecasts

#perating input dataFinancial polic$ issues

Changing ratios


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Value = + + +FCF 1 FCF 2 FCF

(1 + WACC) 1 (1 +WACC)

(1 + WACC) 2

Free cash fow

(FCF)

Weighted averagecost o ca ital

(WACC )

!ro"ectedi#co$e

state$e#ts

!ro"ected%ala#cesheets

tri#sic Value' Fi#a#cial Forecasti#g

!ro"ectedadditio#al

#a#ci#g#eeded (AF )

Forecasti#g'* erati#g

assu$ tio#s

Forecasti#g'Fi#a#cial olic

assu$ tio#s


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Elements of Strategic

Plans&ission statementCorporate scopeStatement of corporate o' ecti)esCorporate strategies

#perating planFinancial plan


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Financial Planning ProcessForecast "nancial statements underalternati)e operating plans+,etermine amount of capitalneeded to support the plan+Forecast the funds that -ill 'egenerated internall$ and identif$sources from -hich re!uirede.ternal capital can 'e raised+


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Financial Planning Process

(ContinuedEsta'lish a performance0'asedmanagement compensations$stem that re-ards emplo$ees forcreating shareholder -ealth+&anagement must monitoroperations after implementing theplan to spot an$ de)iations andthen ta e correcti)e actions+


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Pro Forma FinancialStatements

Three important usesForecast the amount of e.ternal

"nancing that -ill 'e re!uiredE)aluate the impact that changes inthe operating plan ha)e on the )alueof the "rmSet appropriate targets forcompensation plans


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Steps in FinancialForecasting

Forecast salesPro ect the assets needed to supportsalesPro ect internall$ generated fundsPro ect outside funds needed,ecide ho- to raise fundsSee e3ects of plan on ratios and stocprice


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AFN 0 Pro'lem 1 AP4P Co+5n 26117 sales for American Pulp and Paper-ere 8/6 million+ 5n 26127 management

'elie)es that sales -ill increase '$ 2697-ith a continued pro"t margin e.pected to'e *9 and di)idend pa$out ratio of %69+No e.cess capacit$ e.ists+ :i)en thefollo-ing 'alance sheet (in millions 7 -hatis the additional funding needed for 2612+


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AFN 0 Pro'lem 1 AP4P Co+Cash 8 ;+6A


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AFN 0 Pro'lem 1 AP4P Co+A


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AFN 0 Pro'lem 1 AP4P Co+Sales 8 /6+6? Pro"t &argin . +6*

@ Pro"t (N5 8 @;+60 ,i) Pa$out (%69 0 1+2@ Addts to RE @1+


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Pro' B2

2611 alance SheetCash & sec. $20 Accts. pay. &accruals $100

Accounts rec. 240 Notes payable 100Inventories 240 Total CL $200 Total CA $500 L T !ebt 100

Co""on st# 500Net i%e! etaine!Assets 500 'arnin(s 200

Total assets $1000 Total clai"s $1000


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Pro' B2

2611 5ncome Statement)ales $2*000.00Less+ C,-) /0 1*200.00

)-A costs 00.00 '3IT $100.00Interest 1/.00

'3T $ 4.00Ta%es 40 ./0Net inco"e $50.40

6ivi!en!s 0 $15.127


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Key Ratios

N8C In!ustry Con!ition3'9 10.00 20.00 9oor 9ro it :ar(in 2.52 4.00 9oor

,' .20 15./0 9oor 6), 4 .20 !ays 2.00 !ays 9oor Inv. turnover . % 11.00% 9oor ;.A. turnover 4.00% 5.00% 9oor T.A. turnover 2.00% 2.50% 9oor 6ebt


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De$ Ratios (ContinuedN8C In!. Con!.

Net oper. pro . "ar(in a ter ta%es .00 5.00 9oor N,9AT


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AFN (Additional Funds Needed

De$ Assumptions#perating at full capacit$ in 2611+Each t$pe of asset gro-s proportionall$ -ithsales+Pa$a'les and accruals gro- proportionall$-ith sales+

2611 pro"t margin (2+*29 and pa$out(;69 -ill 'e maintained +Sales are e.pected to increase '$ 8*66million+ (9 S @ 2*9


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alance Sheet7 Hat"eld712


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5ncome Statement7 Hat"eld72616


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Comparison of Hat"eld to5ndustr$ sing ,uPontE!uation

R#E @ N5


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Comparison (Continued

Pro"ta'ilit$ ratios lo-er 'ecause ofhigher interest e.pense+=o-er asset management ratiosdue to high le)els of recei)a'lesand in)entor$+Higher le)erage than industr$+

21


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AFN (Additional FundsNeeded E!uation De$Assumptions

#perating at full capacit$ in 2616+Sales are e.pected to increase '$ 1*9

(8;66 million +Asset0to0sales ratios remain the same+Spontaneous0lia'ilities0to0sales ratioremains the same+

2616 pro"t margin (82%


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,e"nitions of aria'les inAFN

A6I


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Hat"eldJs AFN sing AFNE!uation

AFN @ (A 6 I * million+


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De$ Factors in AFNE!uation

Sales gro-th (g The higher g is7 thelarger AFN -ill 'eMother things heldconstant+

Capital intensit$ ratio (A 6I


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AFN De$ Factors (ContinuedPro"t margin (Net income


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Possi'le RatioRelationships ConstantAI


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Economies of Scale in AI


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Nonlinear AI


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Possi'le RatioRelationships =ump$5ncrements

Net plant

)ales0

'%cess CapacityTe"porary

Capacity


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Self0Supporting :ro-thRate

Self0Supporting gro-th rate is the ma.imumgro-th rate the "rm could achie)e if it hadno access to e.ternal capital+

;1

Self0supporting g @ ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, &(1 L P#R S 6A6 I L = 6 I L &(1 L P#R S 6

g @,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

(6+612 (1 6+;* (827666

817266 L 8166 L (+612 (1 6+;* (827666

g @ ,,,,,,,,,,,, @ 1+%%9 81*+/6

8176 %


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Self0Supporting :ro-thRate

5f Hat"eldJs sales gro- less than 1+%%97the "rm -ill not need an$ e.ternal

capital+ The "rmJs self0supporting gro-th rate isin uenced '$ the "rmJs capital intensit$ratio+ The more assets the "rm re!uiresto achie)e a certain sales le)el7 thelo-er its sustaina'le gro-th rate -ill 'e+

;2


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Forecasted Financial Statements5nitial Assumptions for OStead$

Scenario#perating ratios remain unchanged+No additional notes pa$a'le7 =T 'onds7 or common stoc-ill 'e issued+

The interest rate on all de't is 169+5f additional "nancing is needed7 then it -ill 'e raisedthrough a line of credit+ The line of credit -ill 'e tappedon the last da$ of the $ear7 so there -ill 'e no additionalinterest e.penses due to the line of credit+5nterest e.penses for notes pa$a'le and =T 'onds are'ased on the a)erage 'alances during the $ear+5f surplus funds are a)aila'le7 the surplus -ill 'e paidout as a special di)idend pa$ment+Regular di)idends -ill gro- '$ 1*9+Sales -ill gro- '$ 1*9+

;;


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5nputs for Stead$ Scenarioand Target Scenario

;%


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Forecasted Financial Statementsalance Sheets for Stead$

Scenario

;*


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Forecasted Financial Statements5ncome Statement for Stead$

Scenario


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AFN @ 81%2+%+ This AFN amount AFN e!uationamount+

The di3erence results 'ecause thepro"t margin doesnJt remainconstant+

;>

Additional FinancingNeeded


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Forecasted FinancialStatements7 Target Ratios


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Forecasted FinancialStatements7 Target Ratios


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Performance &easures

%6


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Compensation andForecasting

Forecasting models can 'e used toset targets for compensation plans+

The e$ is to re-ards emplo$ees forcreating shareholder intrinsicshareholder )alue+

The emphasis should 'e on the longrun rather than short0runperformance+


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Financing Feed'ac s

Forecast does not include additionalinterest from the line of credit 'ecause-e assumed that the line -as tappedonl$ on the last da$ of the $ear+5t -ould 'e more realistic to assume thatthe line is dra-n upon throughout the$ear+Financing feed'ac s occur -hen theadditional "nancing costs of ne- e.ternalcapital are included in the anal$sis+

%2


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Financing Feed'ac s0Circularit$

Qhen "nancing costs are included7N5 falls7 reducing addition to RE+

RE on 'alance sheet fall+alance sheet no longer 'alances+&ore "nancing is needed+

Process repeats+

%;


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Financing Feed'ac s0Solutions

Repeat process7 iterate until 'alancesheet 'alances+

&anuall$sing Excel J 5teration feature+

se Excel :oal See to "nd rightamount of AFN+se simple formula to ad ust the AFN sothat the ad usted amount of "nancingincorporates "nancing feed'ac see

Ta' 2 in Ch12 Mini Case.xls.

%%


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&ulti0 ear Forecastsuildup in =ine of Credit

5f annual pro ections sho-continuing increase in the =#CJs

'alance7 the 'oard of directors-ould ha)e to step in and ma edecisions regarding the capitalstructure or di)idend polic$

5ssue =T ,e't5ssue E!uit$Cut di)idends

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&ulti0 ear Forecasts Special,i)idends

The 'oard of directors mightdecide to do something else -ith

surplus instead of pa$ specialdi)idends+u$ 'ac shares of stoc +Purchase short0term securities+Pa$ do-n de't+&a e an ac!uisition+

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&odif$ing the Forecasting&odel

Can maintain target capitalstructure each $ear '$ modif$ing

model to issue

Ch.12 - 13ed Fin Planning & ForecastingMaster

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Transcript of Ch.12 - 13ed Fin Planning & ForecastingMaster