I have done this assignment. just want to double-check. its due in two hours

In the SteelCo. example from the reading, the FP&A projected future sales by extrapolating sales in the previous three years. Do you agree with this approach for this particular case? What are the implicit assumptions for this approach? What are the potential caveats? What would you do if you were in charge of forecasting sales? Please briefly explain.

• In any modeling exercise, we will need to make assumptions. It's important for the FP&A team to be explicit about the assumptions and make sure they are reasonable. Which assumptions in the SteelCo. example draw your attention in terms of importance and being potentially problematic that deserves further investigation?
• Both the bottom-up and the top-down approaches can be used to forecast sales. When might you prefer the bottom-up approach? When might you prefer the top-down approach? Please use examples of well-known companies if they help illustrate your view.SteelCo. is a mature company in the steel industry.
• The company went through a recent production expansion which was financed with a loan in June 2008.
  • Contains three covenants: Quick ratio>1, Leverage<5, and Interest cover>1.5
  • The breaking of a covenant triggers a default.
• The company was severely hit by the 2008 financial crisis and subsequent economic downturn.
  • The company breached the interest cover in 2013.The task for the FP&A team is to determine the likelihood of SteelCo. breaching the other two covenants before the end of the loan.

Bank Loan Termsheet

Loan Bank Termsheet
Term	Value
Tenor (Years)	9
Spread	2.50%
Repayment	61% at the ninth year
Amount ( mio)	70 m
Covenants	Acceptable range
Current Assets/Current Liabilities	>1,0
Leverage (Total Liabilities/Shareholders Equity)	<5
Interest Cover (EBITDA/Interest Expense)	>1,5

Define the Problem

• A complete, fully operational financial model is necessary, even though we are only examining two covenants on quick ratio and leverage:
  • FP&A needs to understand the whole operating cycle of the company.
  • FP&A needs to model and create a complete set of pro formats.
    • Items interact with each other. For example, the use of debt depends on the amount of investment, and the use of long-term debt depends on the firm's future strategic investment plans.
• What are the necessary inputs for the model?
  • Projected sales, profit margin, operating expenses,
  • A detailed breakdown of debt and cost of debt,
  • The strategic investment plan, if there is any, and
  • Depreciation.

IV: Build the Model

• Forecast sales growth
  • One approach is to project future sales growth based on historical growth, assuming past performance is a good indicator of future performance. Another approach is to derive growth from the firm's strategic plan. Or use a combination of the two.
  • Communicate with appropriate departments/parties to make sure the parameters and assumptions are reasonable.
    • The quality of the forecast depends largely on the understanding of the firm's operating cycle, data availability, the firm's strategic plans, etc.
  • Identify key drivers for forecasting future financial statements accounts.
    • The percentage of sales approach works for some accounts but not others.
    • Ask questions; check with appropriate parties to gain a better understanding of the interworking of the company.
  • Model the pro forma income statement and balance sheets, as well as the statement of cash flows.
  • Reconcile the pro formas:
    • What is the plug?
    • Use Excel's interactive calculation feature to close the loop.