Tài chính doanh nghiệp - Chapter 17: Financial planning and forecasting

CHAPTER 17Financial Planning and ForecastingForecasting salesProjecting the assets and internally generated fundsProjecting outside funds neededDeciding how to raise fundsBalance sheet (2002),in millions of dollarsCash & sec. $ 20 Accts. pay. & accruals $ 100Accounts rec. 240 Notes payable 100Inventories 240 Total CL $ 200 Total CA $ 500 L-T debt 100 Common stock 500Net fixed Retained assets 500 earnings 200 Total assets $1,000 Total claims $1,000Income statement (2002),in millions of dollarsSales $2,000.00Less: Var. costs (60%) 1,200.00 Fixed costs 700.00 EBIT $ 100.00Interest 16.00 EBT $ 84.00Taxes (40%) 33.60Net income $ 50.40Dividends (30%) $15.12Add’n to RE $35.28Key ratios NWC Industry ConditionBEP 10.00% 20.00% PoorProfit margin 2.52% 4.00% ”ROE 7.20% 15.60% ”DSO 43.80 days 32.00 days ”Inv. turnover 8.33x 11.00x ”F. A. turnover 4.00x 5.00x ”T. A. turnover 2.00x 2.50x ”Debt/assets 30.00% 36.00% GoodTIE 6.25x 9.40x PoorCurrent ratio 2.50x 3.00x ”Payout ratio 30.00% 30.00% O. K.Key assumptionsOperating at full capacity in 2002.Each type of asset grows proportionally with sales.Payables and accruals grow proportionally with sales.2002 profit margin (2.52%) and payout (30%) will be maintained.Sales are expected to increase by $500 million. (%DS = 25%)Determining additional funds needed, using the AFN equationAFN = (A*/S0)ΔS – (L*/S0) ΔS – M(S1)(RR) = ($1,000/$2,000)($500) – ($100/$2,000)($500) – 0.0252($2,500)(0.7) = $180.9 million.How shall AFN 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.Forecasted Income Statement (2003)Sales $2,000 1.25 $2,500Less: VC 1,200 0.60 1,500 FC 700 0.35 875 EBIT $ 100 $ 125Interest 16 16 EBT $ 84 $ 109Taxes (40%) 34 44Net income $ 50 $ 65Div. (30%) $15 $19Add’n to RE $35 $46ForecastBasis2003Forecast200220031st PassForecasted Balance Sheet (2003)Assets2002ForecastBasisCash $ 20 0.01 $ 25Accts. rec. 240 0.12 300Inventories 240 0.12 300 Total CA $ 500 $ 625Net FA 500 0.25 625 Total assets $1,000 $1,25020031st Pass2002ForecastBasisForecasted Balance Sheet (2003)Liabilities and EquityAP/accruals $ 100 0.05 $ 125Notes payable 100 100 Total CL $ 200 $ 225L-T debt 100 100Common stk. 500 500Ret.earnings 200 +46* 246 Total claims $1,000 $1,071* From income statement.What is the additional financing needed (AFN)?Required increase in assets = $ 250Spontaneous increase in liab. = $ 25Increase in retained earnings = $ 46Total AFN = $ 179 NWC must have the assets to generate forecasted sales. The balance sheet must balance, so we must raise $179 million externally.How will the AFN be financed?Additional N/P0.5 ($179) = $89.50Additional L-T debt0.5 ($179) = $89.50But this financing will add to interest expense, which will lower NI and retained earnings. We will generally ignore financing feedbacks.20032nd Pass20031st PassAFNForecasted Balance Sheet (2003)Assets – 2nd passCash $ 25 - $ 25Accts. rec. 300 - 300Inventories 300 - 300 Total CA $ 625 $ 625Net FA 625 - 625 Total assets $1,250 $1,25020032nd Pass20031st PassAFNForecasted Balance Sheet (2003)Liabilities and Equity – 2nd passAP/accruals $ 125 - $ 125Notes payable 100 +89.5 190 Total CL $ 225 $ 315L-T debt 100 +89.5 189Common stk. 500 - 500Ret.earnings 246 - 246 Total claims $1,071 $1,250* From income statement.Why do the AFN equation and financial statement method have different results?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 items to grow at different rates.Forecasted ratios (2003) 2002 2003(E) IndustryBEP 10.00% 10.00% 20.00% PoorProfit margin 2.52% 2.62% 4.00% ”ROE 7.20% 8.77% 15.60% ”DSO (days) 43.80 43.80 32.00 ”Inv. turnover 8.33x 8.33x 11.00x ”F. A. turnover 4.00x 4.00x 5.00x ”T. A. turnover 2.00x 2.00x 2.50x ”D/A ratio 30.00% 40.34% 36.00% ”TIE 6.25x 7.81x 9.40x ”Current ratio 2.50x 1.99x 3.00x ”Payout ratio 30.00% 30.00% 30.00% O. K.What was the net investment in operating capital?OC2003 = NOWC + Net FA = $625 - $125 + $625 = $1,125OC2002 = $900Net investment in OC = $1,125 - $900 = $225How much free cash flow is expected to be generated in 2003?FCF = NOPAT – Net inv. in OC = EBIT (1 – T) – Net inv. in OC = $125 (0.6) – $225 = $75 – $225 = -$150.Suppose fixed assets had only been operating at 75% of capacity in 2002Additional sales could be supported with the existing level of assets.The maximum amount of sales that can be supported by the current level of assets is:Capacity sales = Actual sales / % of capacity = $2,000 / 0.75 = $2,667Since this is less than 2003 forecasted sales, no additional assets are needed.How would the excess capacity situation affect the 2003 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 AFN = $179 – $125 = $54.If sales increased to $3,000 instead, what would be the fixed asset requirement?Target ratio = FA / Capacity sales = $500 / $2,667 = 18.75%Have enough FA for sales up to $2,667, but need FA for another $333 of salesΔFA = 0.1875 ($333) = $62.4How would excess capacity affect the forecasted ratios?Sales wouldn’t change but assets would be lower, so turnovers would be better.Less new debt, hence lower interest, so higher profits, EPS, ROE (when financing feedbacks were considered).Debt ratio, TIE would improve.Forecasted ratios (2003)with projected 2003 sales of $2,500 % of 2002 Capacity 100% 75% IndustryBEP 10.00% 11.11% 20.00%Profit margin 2.62% 2.62% 4.00%ROE 8.77% 8.77% 15.60%DSO (days) 43.80 43.80 32.00Inv. turnover 8.33x 8.33x 11.00xF. A. turnover 4.00x 5.00x 5.00xT. A. turnover 2.00x 2.22x 2.50xD/A ratio 40.34% 33.71% 36.00%TIE 7.81x 7.81x 9.40xCurrent ratio 1.99x 2.48x 3.00xHow is NWC managing 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 capital requirements, and further improve profitability and other ratios.How would the following 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?Increase AFN: Need more assets for given sales.Pay suppliers in 60 days, rather than 30 days?Decrease AFN: Trade creditors supply more capital (i.e., L*/S0 increases).