Excel Activity: Forecasting Financial Statements

Start with the partial model in the file Ch09 P10 Build a Model.xlsx, which contains the 2021 financial statements of Zieber Corporation. Forecast Zieber's 2022 income statement and balance sheets. Use the following assumptions: (1) Sales grow by 7%. (2) The ratios of expenses to sales, depreciation to fixed assets, cash to sales, accounts receivable to sales, inventories to sales, fixed assets to sales, accounts payable to sales, and accruals to sales will be the same in 2022 as in 2021. (3) Zieber will not issue any new stock or new long-term bonds. (4) The interest rate is 11% for long-term debt, and the interest expense on long-term debt is based on the average balance during the year. (5) No interest is earned on cash. (6) Regular dividends grow at a 9% rate. (7) The tax rate is 25%.

Calculate the additional funds needed (AFN). If new financing is required, assume it will be raised by drawing on a line of credit with an interest rate of 12%. Assume that any draw on the line of credit will be made on the last day of the year, so there will be no additional interest expense for the new line of credit. If surplus funds are available, pay a special dividend.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Enter your answers in thousands. For example, an answer of $1.23 thousand should be entered as 1.23, not 1,230. Round your answers to two decimal places. If your answer is zero, enter "0".

What are the forecasted levels of the line of credit and special dividends? (Hints: Create a column showing the ratios for the current year; then create a new column showing the ratios used in the forecast. Also, create a preliminary forecast that doesn't include any new line of credit or special dividends. Identify the financing deficit or surplus in this preliminary forecast and then add a new column that shows the final forecast that includes any new line of credit or special dividend.)

Required line of credit	$ ___ thousand
Special dividends	$ ___ thousand

Now assume that the growth in sales is only 3%. What are the forecasted levels of the line of credit and special dividends?

Required line of credit	$ ___ thousand
Special dividends	$___ thousand

Forecasting Financial Statements
Sales growth rate	7%
Dividend growth rate	9%
Interest rate on long-term debt	11%
Interest rate on line of credit	12%
Tax rate	25%
a. Determining the forecasted levels of the line of credit and special dividends
Zeiber's Projected Financial Statements
(Thousands of Dollars)
1. Balance Sheets	2021	2021 Historical ratios	Forecasting basis	2022 Input ratios	2022 Preliminary forecast (doesn't include special dividend or LOC)	2022 Final forecast (includes special dividend or LOC)
Assets:
Cash	$17,720.00		% of sales
Accounts receivable	101,890.00		% of sales
Inventories	39,870.00		% of sales
Total current assets	$159,480.00
Fixed assets	168,340.00		% of sales
Total assets	$327,820.00
Liabilities and equity
Accounts payable	$26,580.00		% of sales
Accruals	22,150.00		% of sales
Line of credit	0.00		Zero in preliminary forecast
Total current liabilities	$48,730.00
Long-term debt	130,000.00		Carry over from previous year
Total liabilities	$178,730.00
Common stock	60,000.00		Carry over from previous year
Retained earnings	89,090.00		Previous RE + Add. to RE
Total common equity	$149,090.00
Total liabilities and equity	$327,820.00
2. Income Statements	2021	2021 Historical ratios	Forecasting basis	2022 Input ratios	2022 Preliminary forecast (doesn't include special dividend or LOC)	2022 Final forecast (includes special dividend or LOC)
Sales	$443,000.00		Growth
Expenses (excluding depr. & amort.)	376,550.00		% of sales
Depreciation and amortization	13,467.20		% of fixed assets
EBIT	$52,982.80
Interest expense on long-term debt	12,740.00		Interest rate Average debt during year
Interest expense on line of credit	0.00
EBT	$40,242.80
Taxes (25%)	10,060.70
Net income	$30,182.10
Regular common dividends	$15,095.00		Growth
Special dividends	0.00		Zero in preliminary forecast
Addition to retained earnings	$15,087.10
3. Elimination of the Financial Deficit or Surplus
Increase in spontaneous liabilities (accounts payable and accruals)
+ Increase in long-term bonds and common stock
+ Net income (in preliminary forecast) minus regular common dividends
- Previous line of credit
Increase in financing
- Increase in total assets
Amount of financing deficit or surplus
If deficit in financing (negative), draw on line of credit
If surplus in financing (positive), pay special dividend
b. Determining the forecasted levels of the line of credit and special dividends
				Formulas
Sales growth rate	Line of credit	Special dividend		Sales growth rate	Line of credit	Special dividend
(B3)	$0.00	$0.00		(B3)	$0.00	$0.00
3%				3%	#N/A	#N/A