Chapter 9 - Financial planning and forecasting financial statements. This chapter presents the following content: Financial planning, additional funds needed (AFN) formula, forecasted financial statements. | CHAPTER 9 Financial Planning and Forecasting Financial Statements Topics in Chapter Financial planning Additional Funds Needed (AFN) formula Forecasted financial statements Sales forecasts Percent of sales method Financial Planning and Pro Forma Statements Three important uses: Forecast the amount of external financing that will be required Evaluate the impact that changes in the operating plan have on the value of the firm Set appropriate targets for compensation plans Steps in Financial Forecasting Forecast sales Project the assets needed to support sales Project internally generated funds Project outside funds needed Decide how to raise funds See effects of plan on ratios and stock price 2009 Balance Sheet (Millions of $) Cash & sec. $ 20 Accts. pay. & accruals $ 100 Accounts rec. 240 Notes payable 100 Inventories 240 Total CL $ 200 Total CA $ 500 L-T debt 100 Common stk 500 Net fixed assets Retained earnings 200 Total assets $1,000 Total claims $1,000 500 2009 Income Statement (Millions of $) Sales $2, Less: COGS (60%) 1, SGA costs EBIT $ Interest EBT $ Taxes (40%) Net income $ Dividends (40%) $ Add’n to RE $ AFN (Additional Funds Needed) Formula: Key Assumptions Operating 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 = ) and payout (40%) will be maintained. Sales are expected to increase by $500 million. Definitions of Variables in AFN A*/S0: assets required to support sales; called capital intensity ratio. ∆S: increase in sales. L*/S0: spontaneous liabilities ratio M: profit margin (Net income/sales) RR: retention ratio; percent of net income not paid as dividend. Assets Sales 0 1,000 2,000 1,250 2,500 A*/S0 = $1,000/$2,000 = = $1,250/$2,500. Assets = (A*/S0) Sales = ($500) = $250. Assets = sales Assets vs. Sales If assets increase by . | CHAPTER 9 Financial Planning and Forecasting Financial Statements Topics in Chapter Financial planning Additional Funds Needed (AFN) formula Forecasted financial statements Sales forecasts Percent of sales method Financial Planning and Pro Forma Statements Three important uses: Forecast the amount of external financing that will be required Evaluate the impact that changes in the operating plan have on the value of the firm Set appropriate targets for compensation plans Steps in Financial Forecasting Forecast sales Project the assets needed to support sales Project internally generated funds Project outside funds needed Decide how to raise funds See effects of plan on ratios and stock price 2009 Balance Sheet (Millions of $) Cash & sec. $ 20 Accts. pay. & accruals $ 100 Accounts rec. 240 Notes payable 100 Inventories 240 Total CL $ 200 Total CA $ 500 L-T debt 100 Common stk 500 Net fixed assets Retained earnings 200 Total assets $1,000 Total claims $1,000 500 2009 .
