Planning and Forecasting:Example Problems

1.A regression has been performed on Hope students comparing hours ofstudy per week with classroom performance.On the basis of recenthistory, the estimated relationship between hours studied per week andgrade point average (GPA) is as follows:

GPA = 1.31 + 0.11 * (Hours per week)

a.What is the forecasted grade for someone that studies an average of 12 hours per week?

b.If a student's objective is to earn an A- (3.70) GPA, on average how many hours per week should she study?

c.Are "hours of study per week" the only (or best) predictor of cf grade point average?

2.Peachwave had the following balance sheet last year:

Cash$1,800AP$500

AR950Accruals250

Inventories3,500Notes Payable1,750

Net Fixed Assets29,950Common Stock29,700

Retained Earnings4,000

Total Assets$36,200Total Liabilities & RE$36,200

Peachwave has just developed anew yogurt concoction with negative fat and calories.The marketing team expects it will cause next year's sales to increase to $16,000 from last year's sales of $10,000.Peachwave feels that it can handle the increase without adding any fixed assets.Peachwave has a dividend payout ratio of 12% of net income and a profit margin of 6.25%.

a.Construct Peachwave's pro forma balance sheet for next year assuming all accounts that change spontaneously change at the same percent as sales.Any external capital requirements are met 50% by Notes Payable and 50% by common stock.

Planning and Forecasting:Homework

1.JCI had $300 million in sales last year.The company expects that itssales will increase 12 percent during the upcoming year.JCI's CFO usesa simple linear regression to forecast the company's average inventorylevel for a given level of projected sales.On the basis of recent history,the estimated relationship between inventories and sales is providedbelow.Both "inventories" and "sales" are in millions of dollars (i.e., salesof $1,000,000 is put in the equation as 1).

Inventories = $2.5 + 0.0125(Sales)

a.What is the forecasted average inventory level for next year?

b.Currently the warehouse can accommodate $9.3 million in inventory.At what sales level will the warehouse reach maximum capacity?

2.Kraft Heinz had the following condensed balance at the end of last year (inmillions of dollars):

Cash13.5Accounts Payable5.0

Receivables26.0Accrued Liabilities7.5

Inventories68.0Notes Payable23.0

Total Current107.5Total Current35.5

Net Fixed15.0Long Term Bonds6.0

Total Assets122.5Common Stock15.0

Retained Earnings66.0

Total Liabilities & Equity122.5

Sales for last year were $140 million, while net income for the year was$3.5 million.Kraft Heinz paid dividends of $1.4 million to commonstockholders.Assume for next year all accounts that changespontaneously change at the same percent as sales.Fixed assets aresufficient to accommodate next year's sales.The profit margin anddividend payout ratio remain similar.Remember:

Profit Margin = Net Income / Sales

Dividend Payout Ratio = Dividends / Net Income

a.What are Kraft Heinz's Profit Margin and Dividend Payout ratio?

b.If sales are projected to increase by $70 million next year, what is the projected change in retained earnings for next year?

c.Construct Kraft Heinz's pro forma balance sheet for next year.Any additional funds needed are met as follows:80% notes payable and 20% by common stock.