One More Example: Micro Drive Co. This is a book example. Refer to Ch 14 Tool Kit.xls 1

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Forecasting Income Statement Step 1: Analyze the historical ratios. Step 2: Forecast the income statement Sales = the prior year’s sales * (1 + g) EBIT = Sales – Costs – Depreciation where Costs = the prior years’ ratios * Current year’s Costs where Depreciation = the prior year’s ratio * Current year’s Net Plant Interest Expense = Int. rate for ST debt * Notes Payables – Int. rate for ST Investment *ST Investment + Int. rate for LT Debt * LT Debt 6

Forecasting (continued) EBT = EBIT – Int. Exp. Net Income = EBT – Taxes Dividend 2008 = Dividend 2007 * Forecasted Growth Rate Additions to Retained Earnings = Net Income – Forecasted Total Dividend 7

Forecasting the Balance Sheet Forecasting the operating asset Cash 2008 = Sales 2008 * Cash 2007 /Sales 2007 AR 2008 = Sales 2008 * AR 2007 /Sales 2007 Inventories = the same as before 8

(Continued) Forecasting the operating current liabilities Accounts payables and Accruals will increase proportional to sales Notes payable = previous plus “plug” if needed LTD, Pref. Stk., and Com. Stk are assumed to be stable. RE 2008= RE Additions to RE 9

AFN Required assets = $2,085.3 Specified financing = $2,200 AFN = 2,200 – 2,085.3 = $114.7 additional financing is needed. We add $114.7 million into notes payable. The plug approach : specifies the additional amount of either notes payable or short-term investments, but not both. 10

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