AU FIN 614 - Financial Forecasting

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Slide 1Today’s OutlineSlide 3Steps in Financial ForecastingSlide 5Percent of Sales ApproachPercent of Sales ApproachIncome StatementBalance Sheet–AssetsBalance Sheet–LiabilitiesBalance Sheet–EquityExternal Financing Needed (EFN)External Financing Needed (EFN)Pro Forma ExamplePro Forma ExamplePro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Income StatementPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma Balance SheetPro Forma RatiosSlide 41Slide 42Slide 43How Different Factors Affect the EFN Forecast.1 of 4407:32 AMTopic 4b: Financial ForecastingLarry Schrenk, InstructorFIN 614 Financial Management2 of 4407:32 AM•Percent of Sales Method–Sales forecasts–Operating input data–Financial policy issues•Changing ratiosToday’s Outline3 of 4407:32 AMFinancial Forecasting4 of 4407:32 AMSteps in Financial Forecasting•Forecast sales•Project the assets needed to support sales•Project internally generated funds•Project outside funds needed•Decide how to raise funds•See effects of plan on ratios and stock price5 of 4407:32 AMForecasting Pro Forma Statements6 of 4407:32 AMPercent of Sales Approach•Some items vary directly (at least approximately) with sales.•‘Driver’7 of 4407:32 AMPercent of Sales Approach•Some items may not vary with sales–Items whose value cannot be easily changed–Items whose value is determined by other variables, and–Items under the policy control of the firm:•Financing policy: long-term debt and equity•Payout policy: dividends8 of 4407:32 AMIncome Statement•Costs may vary directly with sales. Why?•Depreciation and interest expense may not vary directly with sales. Why?•Dividends generally do not vary directly with sales. Why?9 of 4407:32 AMBalance Sheet–Assets•Generally current assets vary directly with sales. Why?•Generally long-term assets do not vary directly with sales. Why?10 of 4407:32 AMBalance Sheet–Liabilities•Many current liabilities vary directly with sales. Why?•But notes payable do not vary with sales. Why?•Long term debt does not vary with sales. Why?11 of 4407:32 AMBalance Sheet–Equity•How does retained earnings change?•Changes on equity (and all the various sub-groups)do not vary with sales. Why?12 of 4407:32 AMExternal Financing Needed (EFN)•After applying the percentage of sales method, the balance sheet will most likely not balance.•External Financing/Funds Needed (EFN) –difference between •forecasted increase in assets and •the forecasted increase in liabilities and equity.13 of 4407:32 AMExternal Financing Needed (EFN)•EFN is the new capital that must be raised.–This is often called the ‘plug’–EFN can be negative.•Financing policy determines the type of instruments to be used, i.e., whether new funds are raised through debt, equity or some combination of the two.14 of 4407:32 AMPro Forma Example•Exogenous Parameters–Annual Sales Increase: 10%–Firm Policies:•Payout ratio: 75%•Financing: EFN will be raised through equity.15 of 4407:32 AMPro Forma Example•Color Codes–Red Numbers are those which change with sales, e.g., accounts receivable.–Blue numbers are those that do not change with sales, e.g., fixed assets.–Purple numbers are those whose value is determined by firm policies, e.g., dividends.–Black numbers are values which are entirely a function of other variables, e.g. retained earnings.16 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311COGS $1,644Depreciation $276EBIT $391Interest Paid $141EBT $250 Taxes $85 Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income Statement17 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311COGS $1,644Depreciation $276EBIT $391Interest Paid $141EBT $250 Taxes $85 Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income StatementChanges with SalesNo ChangePre-DeterminedFollows Policy18 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542 Increases by 10%COGS $1,644Depreciation $276EBIT $391Interest Paid $141EBT $250 Taxes $85 Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income Statement19 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542COGS $1,644 $1,808 Increases with SalesDepreciation $276EBIT $391Interest Paid $141EBT $250 Taxes $85 Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income Statement20 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542COGS $1,644 $1,808Depreciation $276 $276 No Change: No Capital Invest.EBIT $391Interest Paid $141EBT $250 Taxes $85 Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income Statement21 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542COGS $1,644 $1,808Depreciation $276 $276EBIT $391 $458Interest Paid $141 $141 No Change (Debt Not Changed)EBT $250 Taxes $85 Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income Statement22 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542COGS $1,644 $1,808Depreciation $276 $276EBIT $391 $458Interest Paid $141 $141EBT $250 $317Taxes $85 $108 Tax Rate is 34%Net Income $165 Dividends $121 Addition to Ret. Earn. $44Pro Forma Income Statement23 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542COGS $1,644 $1,808Depreciation $276 $276EBIT $391 $458Interest Paid $141 $141EBT $250 $317Taxes $85 $108Net Income $165 $209 Dividends $121 $157 Dividends are 75% of Net Income Addition to Ret. Earn. $44Pro Forma Income Statement24 of 4407:32 AMIncome Statement 2006 pro formaSales $2,311 $2,542COGS $1,644 $1,808Depreciation $276 $276EBIT $391 $458Interest Paid $141 $141EBT $250 $317Taxes $85 $108Net Income $165 $209 Dividends $121 $157 Addition to Ret. Earn. $44 $52 Add to Retained EarningPro Forma Income Statement25 of 4407:32 AMPro Forma Balance SheetBalance Sheet 2006


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AU FIN 614 - Financial Forecasting

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