1. CHAPTER 17 Financial Planning and Forecasting

2. Outline AFN: Additional funds needed Income statement: from sales to net income – Sales – COGS and Gross Margin – Expense and Operating Margin – Net income and EPS Balance sheet: – Increased assets to support increased sales – Increased liability and equity to fund increased assets

3. Key Assumptions in Preliminary Financial Forecast for NWC Operating at full capacity in 2012. Each type of asset grows proportionally with sales. Payables and accruals grow proportionally with sales. 2012 profit margin (2.52%) and payout (30%) will be maintained. Sales are expected to increase by $500 million. (%  S = 25%) 17-3

4. Preliminary Financial Forecast: Balance Sheets (Assets) 2012 2013E Cash and equivalents$ 20$ 25 Accounts receivable240300 Inventories 240 300 Total current assets$ 500$ 625 Net fixed assets 500 625 Total assets$1,000$1,250 17-4

5. 2012 2013E A/P & accrued liabilities$ 100$ 125 Notes payable 100 190 Total current liabilities $ 200$ 315 Long-term debt 100190 Common stock 500 Retained earnings 200 245 Total liabilities & equity$1,000$1,250 Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity) 17-5

6. Preliminary Financial Forecast: Income Statements 17-6 2012 2013E Sales$2,000.0$2,500.0 Variable costs1,200.01,500.0 Fixed costs 700.0 875.0 EBIT$ 100.0$ 125.0 Interest 16.0 EBT$ 84.0$ 109.0 Taxes (40%) 33.6 43.6 Net income$ 50.4$ 65.4 Dividends (30% of NI)$15.12$19.62 Addition to retained earnings$35.28$45.78

7. Key Financial Ratios 20122013EInd AvgComment Basic earning power10.00% 20.00%Poor Profit margin2.52%2.62%4.00%Poor Return on equity7.20%8.77%15.60%Poor Days sales outstanding43.8 days 32.0 daysPoor Inventory turnover8.33x 11.00xPoor Fixed assets turnover4.00x 5.00xPoor Total assets turnover2.00x 2.50xPoor Debt/Assets30.00%40.40%36.00%OK Times interest earned6.25x7.81x9.40xPoor Current ratio2.50x1.99x3.00xPoor Payout ratio30.00% OK 17-7

8. Determining Additional Funds Needed Using the AFN Equation AFN= projected increase in assets-Spontaneous increase in liabilities-increase in retailed earnings (A 0 */S 0 )  S – (L 0 */S 0 )  S – M(S 1 )(1 – Payout) = ($1,000/$2,000)($500) – ($100/$2,000)($500) – 0.0252($2,500)(0.7)= $180.9 million Notes: ΔS –change in sales, M-Net Profit margin. A 0 */S 0: asset to sales ratio(capital intensity ratio), at full capacity, A 0 is total assets. L 0 * : spontaneously generated liability

9. An example-WMT 2014Jan2015Jan Sales$500B$550 Total asset$200 AP$35 AR$15 Profit margin3% Payout40%

10. Determining Additional Funds Needed Using the AFN Equation AFN= projected increase in assets-Spontaneous increase in liabilities-increase in retailed earnings (A 0 */S 0 )  S – (L 0 */S 0 )  S – M(S 1 )(1 – Payout)=?