Fundamentals of Financial ManagementCHAPTER 4 Financial Planning and Forecasting.ppt

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1、,CHAPTER 4Financial Planning and Forecasting,Forecasting salesProjecting the assets needed to support salesProjecting internally generated fundsProjecting outside funds neededDeciding how to raise fundsSeeing the effects of a plan on ratios,2000 Balance Sheet(Millions of$),Cash&sec.$20Accts.pay.&acc

2、ruals$100Accounts rec.240Notes payable 100Inventories 240Total CL$200Total CA$500L-T debt100Common stock500Net fixedRetained assets 500 earnings 200Total assets$1,000Total claims$1,000,2000 Income Statement(Millions of$),Sales$2,000.00Less:Var.costs(60%)1,200.00Fixed costs 700.00EBIT$100.00Interest

3、16.00EBT$84.00Taxes(40%)33.60Net income$50.40Dividends(30%)$15.12Addn to RE$35.28,NWC Industry ConditionBEP10.00%20.00%PoorProfit margin2.52%4.00%”ROE7.20%15.60%”DSO43.20 days32.00 days”Inv.turnover8.33x11.00 x”F.A.turnover4.00 x5.00 x”T.A.turnover2.00 x2.50 x”Debt/assets30.00%36.00%GoodTIE6.25x9.40

4、 xPoorCurrent ratio2.50 x3.00 x”Payout ratio30.00%30.00%O.K.,Key Ratios,Key Assumptions,Operating at full capacity in 2000.Each type of asset grows proportionally with sales.Payables and accruals grow proportionally with sales.2000 profit margin(2.52%)and payout(30%)will be maintained.Sales are expe

5、cted to increase by$500 million.(%DS=25%),Assets,Sales,0,1,000,2,000,1,250,2,500,A*/S0=1,000/2,000=0.5,=1,250/2,500.,D Assets=(A*/S0)D Sales=0.5(500)=250.,Assets=0.5 sales,Assets must increase by$250 million.What is the AFN,based on the AFN equation?,AFN=(A*/S0)DS(L*/S0)DS M(S1)(RR)=($1,000/$2,000)(

6、$500)($100/$2,000)($500)0.0252($2,500)(0.7)=$180.9 million.,Assumptions about How AFN Will Be Raised,The payout ratio will remain at 30 percent(d=30%;RR=70%).No new common stock will be issued.Any external funds needed will be raised as debt,50%notes payable and 50%L-T debt.,Sales$2,0001.25$2,500Les

7、s:VC1,2000.601,500FC 7000.35 875 EBIT$100$125Interest 16 16 EBT$84$109Taxes(40%)34 44Net income$50$65Div.(30%)$15$19Addn to RE$35$46,ForecastBasis,2001Forecast,2001 Forecasted Income Statement,2000,At full capacity,so all assets must increase in proportion to sales.,2000,1st Pass,ForecastBasis,Cash$

8、200.01$25Accts.rec.2400.12300Inventories 2400.12 300 Total CA$500$625Net FA 5000.25 625 Total assets$1,000$1,250,2001 Balance Sheet(Assets),*From income statement.,2000,2001,ForecastBasis,AP/accruals$1000.05$125Notes payable 100 100 Total CL$200$225L-T debt 100100Common stk.500500Ret.earnings 200+46

9、*246 Total claims$1,000$1,071,2001 Balance Sheet(Claims),What is the additional financing needed(AFN)?,NWC must have the assets to make forecasted sales.The balance sheet must balance.So,we must raise$179 externally.,Required increase in assets=$250Spontaneous increase in liab.=$25Increase in retain

10、ed earnings=$46Total AFN=$179,How will the AFN be financed?,Additional notes payable=0.5($179)=$89.50 Additional L-T debt=0.5($179)=$89.50,But this financing will add to interest expense,which will lower NI and retained earnings.We will generally ignore financing feedbacks.,2001 2nd Pass Balance She

11、et(Assets),No change in asset requirements.,1st Pass,2nd Pass,AFN,Cash$25$25Accts.rec.300300Inventories 300 300 Total CA$625$625Net FA 625 625 Total assets$1,250$1,250,2001 2nd Pass Balance Sheet(Claims),1st Pass,2nd Pass,AFN,AP/accruals$125$125Notes payable 100+89.5 190 Total CL$225$315L-T debt100+

12、89.5189Common stk.500500Ret.earnings 246 246 Total claims$1,069$1,250,Equation AFN=$181 vs.$179.Why different?,Equation method assumes a constant profit margin,a constant dividend payout,and a constant capital structure.Financial statement method is more flexible.More important,it allows different i

13、tems to grow at different rates.,Ratios,20002001(E)Industry,BEP10.00%10.00%20.00%PoorProfit margin2.52%2.62%4.00%”ROE7.20%8.77%15.60%”DSO(days)43.2043.2032.00”Inv.turnover8.33x8.33x11.00 x”F.A.turnover4.00 x4.00 x5.00 x”T.A.turnover2.00 x2.00 x2.50 x”D/A ratio30.00%40.34%36.00%”TIE6.25x7.81x9.4x”Cur

14、rent ratio2.50 x1.99x3.00 x”Payout ratio30.00%30.00%30.00%O.K.,What was the net investment in operating capital?,Oper.cap.2001=NOWC+Net FA=$625$125+$625=$1,125.Oper.cap.2000=$900.=$1,125$900=$225.,Net inv.in oper.cap.,How much free cash flow wasgenerated in 2001?,FCF=NOPAT Net inv.in oper.cap.=EBIT(

15、1 T)Net inv.in oper.cap.=$125(0.6)$225=$75$225=-$150.,Suppose in 2000 fixed assets had been operated at only 75%of capacity.,With the existing fixed assets,sales could be$2,667.Since sales are forecasted at only$2,500,no new fixed assets are needed.,How would the excess capacity situation affect the

16、 2001 AFN?,The projected increase in fixed assets was$125,the AFN would decrease by$125.Since no new fixed assets will be needed,AFN will fall by$125,to$179$125=$54.,Q.If sales went up to$3,000,not$2,500,what would the F.A.requirement be?,A.Target ratio=FA/Capacity sales=500/2,667=18.75%.,Have enoug

17、h F.A.for sales up to$2,667,but need F.A.for another$333 of sales:,DFA=0.1875(333)=$62.4.,How would excess capacity affect the forecasted ratios?,1.Sales wouldnt change but assets would be lower,so turnovers would be better.2.Less new debt,hence lower interest,so higher profits,EPS,ROE(when financin

18、g feedbacks considered).3.Debt ratio,TIE would improve.,2001 Forecasted Ratios:S01=$2,500,%of 2000 Capacity 100%75%Industry,BEP10.00%11.11%20.00%Profit margin2.62%2.62%4.00%ROE8.77%8.77%15.60%DSO(days)43.2043.2032.00Inv.turnover8.33x8.33x11.00 xF.A.turnover4.00 x5.00 x5.00 xT.A.turnover2.00 x2.22x2.

19、50 xD/A ratio40.34%33.71%36.00%TIE7.81x7.81x9.40 xCurrent ratio1.99x2.48x3.00 x,How is NWC performing with regard to its receivables and inventories?,DSO is higher than the industry average,and inventory turnover is lower than the industry average.Improvements here would lower current assets,reduce

20、capital requirements,and further improve profitability and other ratios.,Assets,Sales,0,1,100,1,000,2,000,2,500,Declining A/S Ratio,1,000/2,000=0.5;1,100/2,500=0.44.Declining ratio shows economies of scale.Going from S=0 to S=$2,000 requires$1,000 of assets.Next$500 of sales requires only$100 of ass

21、ets.,BaseStock,Assets,Sales,1,000,2,000,500,A/S changes if assets are lumpy.Generally will have excess capacity,but eventually a small DS leads to a large DA.,500,1,000,1,500,Regression Analysis for Asset Forecasting,Get historical data on a good company,then fit a regression line to see how much a

22、given sales increase will require in way of asset increase.,Example of Regression,Constant ratio overestimates inventory required to go from S1=2,000 to S2=2,500.,For a Well-Managed Co.,Year,Sales,Inv.,1998,$1,280,$118,1999,1,600,138,2000,2,000,162,2001E,2,500E,192E,Inventory,Sales(000),1.28,1.6,2.0

23、,2.5,Regressionline,Constantratio forecast,How would increases in these items affect the AFN?,Higher dividend payout ratio?Increase AFN:Less retained earnings.Higher profit margin?Decrease AFN:Higher profits,more retained earnings.Higher capital intensity ratio,A*/S0?Increase AFN:Need more assets fo

24、r given sales increase.Pay suppliers in 60 days rather than 30 days?Decrease AFN:Trade creditors supply more capital,i.e.,L*/S0 increases.,Summary:How different factors affect the AFN forecast.,Excess capacity:Existence lowers AFN.Base stocks of assets:Leads to less-than-proportional asset increases.Economies of scale:Also leads to less-than-proportional asset increases.Lumpy assets:Leads to large periodic AFN requirements,recurring excess capacity.,