Kế toán, kiểm toán - Chapter 9: Financial planning and forecasting financial statements

CHAPTER 9Financial Planning and Forecasting Financial Statements1Topics in ChapterFinancial planningAdditional Funds Needed (AFN) formulaForecasted financial statementsSales forecastsPercent of sales method2Financial Planning and Pro Forma StatementsThree important uses:Forecast the amount of external financing that will be requiredEvaluate the impact that changes in the operating plan have on the value of the firmSet appropriate targets for compensation plans3Steps in Financial ForecastingForecast salesProject the assets needed to support salesProject internally generated fundsProject outside funds neededDecide how to raise fundsSee effects of plan on ratios and stock price42009 Balance Sheet(Millions of $)Cash & sec.$ 20Accts. pay. &accruals$ 100Accounts rec.240Notes payable 100Inventories 240 Total CL$ 200 Total CA$ 500L-T debt100Common stk500Net fixedassetsRetainedearnings 200 Total assets$1,000 Total claims$1,000 50052009 Income Statement(Millions of $)Sales$2,000.00Less: COGS (60%) 1,200.00 SGA costs 700.00 EBIT$ 100.00Interest 10.00 EBT$ 90.00Taxes (40%) 36.00Net income$ 54.00Dividends (40%)$21.60Add’n to RE$32.406AFN (Additional Funds Needed) Formula: Key AssumptionsOperating at full capacity in 2009.Each type of asset grows proportionally with sales.Payables and accruals grow proportionally with sales.2009 profit margin ($54/$2,000 = 2.70%) and payout (40%) will be maintained.Sales are expected to increase by $500 million.7Definitions of Variables in AFNA*/S0: assets required to support sales; called capital intensity ratio.∆S: increase in sales.L*/S0: spontaneous liabilities ratioM: profit margin (Net income/sales)RR: retention ratio; percent of net income not paid as dividend.8AssetsSales01,0002,0001,2502,500A*/S0 = $1,000/$2,000 = 0.5 = $1,250/$2,500. Assets =(A*/S0)Sales= 0.5($500)= $250.Assets = 0.5 salesAssets vs. Sales9If assets increase by $250 million, what is the AFN?AFN = (A*/S0)∆S - (L*/S0)∆S - M(S1)(RR)AFN = ($1,000/$2,000)($500) - ($100/$2,000)($500) - 0.0270($2,500)(1 - 0.4)AFN = $184.5 million.10How would increases in these items affect the AFN?Higher sales:Increases asset requirements, increases AFN.Higher dividend payout ratio:Reduces funds available internally, increases AFN.(More)11Higher profit margin:Increases funds available internally, decreases AFN.Higher capital intensity ratio, A*/S0:Increases asset requirements, increases AFN.Pay suppliers sooner:Decreases spontaneous liabilities, increases AFN.12Forecasted Financial Statements MethodProject sales based on forecasted growth rate in salesForecast some items as a percent of the forecasted salesCostsCashAccounts receivable(More...)13Items as percent of sales (Continued...)InventoriesNet fixed assetsAccounts payable and accrualsChoose other itemsDebtDividend policy (which determines retained earnings)Common stock14Sources of Financing Needed to Support Asset RequirementsGiven the previous assumptions and choices, we can estimate:Required assets to support salesSpecified sources of financingAdditional funds needed (AFN) is:Required assets minus specified sources of financing 15Implications of AFNIf AFN is positive, then you must secure additional financing.If AFN is negative, then you have more financing than is needed.Pay off debt.Buy back stock.Buy short-term investments.16How to Forecast Interest ExpenseInterest expense is actually based on the daily balance of debt during the year.There are three ways to approximate interest expense. Base it on: Debt at end of yearDebt at beginning of yearAverage of beginning and ending debtMore17Basing Interest Expense on Debt at End of YearWill over-estimate interest expense if debt is added throughout the year instead of all on January 1. Causes circularity called financial feedback: more debt causes more interest, which reduces net income, which reduces retained earnings, which causes more debt, etc.More18Basing Interest Expense on Debt at Beginning of YearWill under-estimate interest expense if debt is added throughout the year instead of all on December 31. But doesn’t cause problem of circularity.More19Basing Interest Expense on Average of Beginning and Ending DebtWill accurately estimate the interest payments if debt is added smoothly throughout the year. But has problem of circularity.More20A Solution that Balances Accuracy and ComplexityBase interest expense on beginning debt, but use a slightly higher interest rate.Easy to implementReasonably accurateFor examples that bases interest expense on average debt, see:Web Extension 9A.doc and IFM10 Ch09 WebA Tool Kit.xlsIFM10 Ch09 Mini Case Feedback.xls21Percent of Sales: Inputs2009 Actual2010 Proj.COGS/Sales60%60%SGA/Sales35%35%Cash/Sales1%1%Acct. rec./Sales12%12%Inv./Sales12%12%Net FA/Sales25%25%AP & accr./Sales5%5%22Other InputsPercent growth in sales 25%Growth factor in sales (g)1.25Interest rate on debt10%Tax rate40%Dividend payout rate40%232010 First-Pass Forecasted Income StatementCalculations2010 1st PassSales1.25 Sales09 =$2,500.0Less: COGS60% Sales10 = 1,500.0 SGA35% Sales10 =875.0EBIT$125.0Interest0.1(Debt09) =20.0EBT$105.0Taxes (40%)42.0Net Income$63.0Div. (40%)$25.2Add to RE$37.8242010 Balance Sheet (Assets)Calcuations2010Cash1% Sales10 =$25.0Accts Rec.12%Sales10 =300.0Inventories12%Sales10 =300.0Total CA$625.0Net FA25% Sales10 =625.0Total Assets$1,250.0252010 Preliminary Balance Sheet (Claims)Calculations2010 Without AFNAP/accruals5% Sales10 =$125.0Notes payable100Carried over100.0Total CL$225.0L-T debt100Carried over100.0Common stk500Carried over500.0Ret earnings200+37.8*237.8Total claims$1,062.826What are the additional funds needed (AFN)?Required assets = $1,250.0Specified sources of fin. = $1,062.8Forecast AFN: $1,250 - $1,062.8 = $187.2NWC must have the assets to make forecasted sales, and so it needs an equal amount of financing. So, we must secure another $187.2 of financing.27Assumptions about how AFN will be raisedNo new common stock will be issued.Any external funds needed will be raised as debt, 50% notes payable, and 50% L-T debt.28How will the AFN be financed?Additional notes payable =0.5 ($187.2) = $93.6.Additional L-T debt = 0.5 ($187.2) = $93.6.292010 Balance Sheet (Claims)w/o AFNAFNWith AFNAP accruals$125.0$125.0Notes payable100.0+93.6193.6Total CL$225.0$318.6L-T Debt100.0+93.6193.6Common stk500.0500.0Ret earnings237.8237.8Total claims$1,071.0$1250.030Equation AFN = $184.5 vs. Pro Forma AFN = $187.2.Equation method assumes a constant profit margin.Pro forma method is more flexible. More important, it allows different items to grow at different rates.31Forecasted Ratios20092010(E)IndustryProfit Margin2.70%2.52%4.00%ROE7.71%8.54%15.60%DSO (days)43.8043.8032.00Inv turnover8.338.3311.00FA turnover4.004.005.00Debt ratio30.00%40.98%36.00%TIE10.006.259.40Current ratio2.501.963.0032What are the forecasted free cash flow and ROIC?20092010(E)Net operating WC(CA - AP & accruals)$400$500Total operating capital(Net op. WC + net FA) $900$1,125NOPAT (EBITx(1-T)) Less Inv. in op. capital$60$75$225Free cash flow-$150ROIC (NOPAT/Capital)6.7%33Proposed ImprovementsBeforeAfterDSO (days)43.8032.00Accts. rec./Sales12.00%8.77%Inventory turnover8.3311.00Inventory/Sales12.00%9.09%SGA/Sales35.00%33.00%34Impact of Improvements (see IFM10 Ch09 Mini Case.xls for details)BeforeAfterAF$187.2$15.7Free cash flow-$150.0$33.5ROIC (NOPAT/Capital)6.7%10.8%ROE7.7%12.3%35If 2009 fixed assets had been operated at 75% of capacity:Capacity sales =Actual sales% of capacity= = $2,667.$2,0000.75With the existing fixed assets, sales could be $2,667. Since sales are forecasted at only $2,500, no new fixed assets are needed.36How would the excess capacity situation affect the 2010 AFN?The previously projected increase in fixed assets was $125.Since no new fixed assets will be needed, AFN will fall by $125, to: $187.2 - $125 = $62.2.37AssetsSales01,1001,0002,0002,500Declining 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 assets.BaseStockEconomies of Scale38AssetsSales1,0002,000500A/S changes if assets are lumpy. Generally will have excess capacity, but eventually a small S leads to a large A.5001,0001,500Lumpy Assets39Summary: How different factors affect the AFN forecast.Excess capacity: lowers AFN.Economies of scale: leads to less-than-proportional asset increases.Lumpy assets: leads to large periodic AFN requirements, recurring excess capacity.40