Q1 Solve for the Firm's external funding required.

Steps in forecasting

1 Use historical data to come up with a sales forecast

2 Examine Hisyorical Data to determine how key accounts move in step with sales

3 Extrapolate

Q2 What is sustainable growth rate? How is it solved? Finally, how can firms speed up growth? Slow it down?

ET LATE ME LE HR CH THLETE SETE ( 4 ) / WW LAM HAM + ) - MI - All FIT w We PRIP # 4 AT 19111 === SENE hatice I!!! 01 Solve for the firm's external funding required. 2016 11190 9400 1790 Income Statements 2017 2018 13764 16104 11699 13688 2065 2416 2019 20613 17727 2886 Net sales Cost of goods sold Gross profit Expenses: General, selling, and administrative expenses Net interest expense Earnings before tax Earnings after tax 1019 100 671 301.95 369.05 1239 103 723 32535 397.65 1610 110 696 313.2 382.8 2267 90 529 238.05 290.95 Balance Sheets Assets 671 1343 1119 14 3147 128 3275 551 1789 1376 12 3728 124 3852 644 2094 1932 15 4685 295 4980 412 2886 2267 18 5583 287 5870 Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fored assets Total assets Liabilities and owner's equity Current liabilities: Bank loan Accounts payable Current portion of lone-term debt Accrued wages Total current liabilities Long term debt Common stock Retained earnings Total Mobiles and owners' equity 50 1007 60 5 1122 960 150 1043 3275 50 1443 50 Z 1550 910 150 1242 3852 50 2426 50 10 2536 860 150 1434 4980 50 3212 100 18 3380 760 150 1580 5870 Steps in forecasting 1) Use historical data to come up with a sales forecast 2) Examine historical data to determine how key accounts move in step with sales 3) Extrapolate 02 What is sustainable growth rate? How is it solved? Finally, How can firms speed up growth? Slow it down? Agrowth 0. 000 22 2013 2015 2016 2030 017 020 05 Redes O forecantepectations 0.00 0.11 012 15 15 2 18 One way to the chose to the 47 11 51 The team 45 to your parts Way Cats General de Cathers Account networy Ansvar 6.30 18 forms Sales Capas Grat General and TH Caminho Balance Sheet y defined by the heather for and will NO w the wount of the local etween the time in the stotine the other med angi Current Cash and A waterfowed the tocht and che Prepeat Toca ch by management with and he wanted 280. The pen by management, the de credit the Total de Current Bank AROUND Current portion of anger Audwig Teatre Lorem Commons dering Yotund Borobu This entering the 22 y mantel twoterm 150 manat Before and for the returned into the mechether the ind you stered fonding- luthathu Natt not uncommon form cependan needed in this the contes 0,514 mint Solve for the fi8rm's external funding required. Income Statements 2016 2017 2018 11190 13764 16104 9400 11699 13688 1790 2065 2416 2019 20613 17727 2886 Net sales Cost of goods sold Gross profit Expenses: General, selling, and administrative expenses Net interest expense Earnings before tax Tax Earnings after tax 1019 100 671 301.95 369.05 1239 103 723 325.35 397.65 1610 110 696 2267 90 529 238.05 290.95 313.2 382.8 Balance Sheets Assets 644 412 Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets 671 1343 1119 14 551 1789 1376 12 2886 2267 18 2094 1932 15 4685 295 4980 3147 128 3275 3728 124 3852 5583 287 5870 Liabilities and owner's equity A 7 Current liabilities: Bank loan Accounts payable Current portion of long-term debt Accrued wages Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and owners' equity 50 1007 60 5 1122 960 150 1043 3275 50 1443 50 7 1550 910 150 1242 3852 50 2426 50 10 2536 860 150 1434 4980 50 3212 100 18 3380 760 150 1580 5870 N CD = Sheet1 1 K M N 0 P Q R S T 2016 2020F 0.28 0.25 Assumptions 2017 2018 2019E 0.23 0.17 Ratios Tied to Sales 0.85 0.85 0.09 0.10 15 15 47 47 9 7 45 65 0.84 0.09 22 44 8 39 Sales) 0.86 0.11 7 51 0.86 Note: Forecasts are based on management expecta 0.12 18 Note: One way to increase the amount of cash is to 51 rate at which you collect receivables and it takes to pay your payables (but be care 59 00 9 8 66 pforma Financial Statements 90 Initially a constant equal to the most recent value, but will obviously depend on the size of the loan required by the firm So, the amount of the loan will affect earnings after tax (b/c of interest expenses), and earnings aft (45% tax rate) and retained earnings will affect the amount of the loan (circular calculation) How are the income statement and the balance sheet related? The financial accontant is more interested in the BS to est required! They're related since the size of the loan affects interest affects earnings after tax affects retained of the loan :-) How did I do this? Follow the same approach followed using ratio analysis. Note: This is the minimum amount of cash ma since more cash will just add to the loan amount (and cost the firm money) 20 Rough estimate by management (since PPE move erratically with sales, and since the amounts are small, we just needar 20 280 Based on current fixed assets, proposed capital budget, and depreciation. These are all given by management, so the equ 300 new fixed assets. last period's fixed assets plus proposed capital expenditures minus depreciation for the yea H . N 9 R Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets How did I do this? Follow the same approach followed using ratio analysis. Note: This is the mini Since more cash will just add to the loan amount (and cost the firm money) 20 Rough estimate by management (since PPE move ertatically with sales, and since the amounts are 20 280 Based on current fixed assets, proposed capital budget, and depreciation. These are all given by m 300 new fixed assets last period's fixed assets plus proposed capital expenditures minus Liabilities and owners' equity Current liabilities Bank loan Accounts payable Current portion of long-term debt Accrued wages Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and owners'equity External funding required O For now, but used to so 100 This is given and is equal to the principal repayment due during the current year 22 Rough estimate by management, same logicas PPE 660 Always equal to last year's value less current portion of long-term debt 150 CS remains constant since this company does not plan to issue new equity 1580 Retained earnings is solved for using the following equation: Retained earnings for the current yea 2390 plus earnings after tax minus dividends given the firm's retention rate (1-RR is the divide External funding = Total expected assets - (total expected liabilities + total expected owner's equity) Note: It is not uncommon for a firm experiencing decreasing cash, an increasing collectible period, and an increasing payables period to go to the bank for a lo actually needed (in this example, the company initially thought they'd need only $500,000, but they need closer to $1,4 million So, given our growth expectations, and therefore what we'll need to invest in terms of purchasing assets to take advantage of growth opportunities, external funding required is over $1,4 million Note: Show students how to perform circular calcul ons in MS Excel (first set interest expense equal to 0.10"(1994H42+H47) Or, interest expense =0.1'current portion of long-term debt + long-term debt + external funding required ET LATE ME LE HR CH THLETE SETE ( 4 ) / WW LAM HAM + ) - MI - All FIT w We PRIP # 4 AT 19111 === SENE hatice I!!! 01 Solve for the firm's external funding required. 2016 11190 9400 1790 Income Statements 2017 2018 13764 16104 11699 13688 2065 2416 2019 20613 17727 2886 Net sales Cost of goods sold Gross profit Expenses: General, selling, and administrative expenses Net interest expense Earnings before tax Earnings after tax 1019 100 671 301.95 369.05 1239 103 723 32535 397.65 1610 110 696 313.2 382.8 2267 90 529 238.05 290.95 Balance Sheets Assets 671 1343 1119 14 3147 128 3275 551 1789 1376 12 3728 124 3852 644 2094 1932 15 4685 295 4980 412 2886 2267 18 5583 287 5870 Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fored assets Total assets Liabilities and owner's equity Current liabilities: Bank loan Accounts payable Current portion of lone-term debt Accrued wages Total current liabilities Long term debt Common stock Retained earnings Total Mobiles and owners' equity 50 1007 60 5 1122 960 150 1043 3275 50 1443 50 Z 1550 910 150 1242 3852 50 2426 50 10 2536 860 150 1434 4980 50 3212 100 18 3380 760 150 1580 5870 Steps in forecasting 1) Use historical data to come up with a sales forecast 2) Examine historical data to determine how key accounts move in step with sales 3) Extrapolate 02 What is sustainable growth rate? How is it solved? Finally, How can firms speed up growth? Slow it down? Agrowth 0. 000 22 2013 2015 2016 2030 017 020 05 Redes O forecantepectations 0.00 0.11 012 15 15 2 18 One way to the chose to the 47 11 51 The team 45 to your parts Way Cats General de Cathers Account networy Ansvar 6.30 18 forms Sales Capas Grat General and TH Caminho Balance Sheet y defined by the heather for and will NO w the wount of the local etween the time in the stotine the other med angi Current Cash and A waterfowed the tocht and che Prepeat Toca ch by management with and he wanted 280. The pen by management, the de credit the Total de Current Bank AROUND Current portion of anger Audwig Teatre Lorem Commons dering Yotund Borobu This entering the 22 y mantel twoterm 150 manat Before and for the returned into the mechether the ind you stered fonding- luthathu Natt not uncommon form cependan needed in this the contes 0,514 mint Solve for the fi8rm's external funding required. Income Statements 2016 2017 2018 11190 13764 16104 9400 11699 13688 1790 2065 2416 2019 20613 17727 2886 Net sales Cost of goods sold Gross profit Expenses: General, selling, and administrative expenses Net interest expense Earnings before tax Tax Earnings after tax 1019 100 671 301.95 369.05 1239 103 723 325.35 397.65 1610 110 696 2267 90 529 238.05 290.95 313.2 382.8 Balance Sheets Assets 644 412 Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets 671 1343 1119 14 551 1789 1376 12 2886 2267 18 2094 1932 15 4685 295 4980 3147 128 3275 3728 124 3852 5583 287 5870 Liabilities and owner's equity A 7 Current liabilities: Bank loan Accounts payable Current portion of long-term debt Accrued wages Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and owners' equity 50 1007 60 5 1122 960 150 1043 3275 50 1443 50 7 1550 910 150 1242 3852 50 2426 50 10 2536 860 150 1434 4980 50 3212 100 18 3380 760 150 1580 5870 N CD = Sheet1 1 K M N 0 P Q R S T 2016 2020F 0.28 0.25 Assumptions 2017 2018 2019E 0.23 0.17 Ratios Tied to Sales 0.85 0.85 0.09 0.10 15 15 47 47 9 7 45 65 0.84 0.09 22 44 8 39 Sales) 0.86 0.11 7 51 0.86 Note: Forecasts are based on management expecta 0.12 18 Note: One way to increase the amount of cash is to 51 rate at which you collect receivables and it takes to pay your payables (but be care 59 00 9 8 66 pforma Financial Statements 90 Initially a constant equal to the most recent value, but will obviously depend on the size of the loan required by the firm So, the amount of the loan will affect earnings after tax (b/c of interest expenses), and earnings aft (45% tax rate) and retained earnings will affect the amount of the loan (circular calculation) How are the income statement and the balance sheet related? The financial accontant is more interested in the BS to est required! They're related since the size of the loan affects interest affects earnings after tax affects retained of the loan :-) How did I do this? Follow the same approach followed using ratio analysis. Note: This is the minimum amount of cash ma since more cash will just add to the loan amount (and cost the firm money) 20 Rough estimate by management (since PPE move erratically with sales, and since the amounts are small, we just needar 20 280 Based on current fixed assets, proposed capital budget, and depreciation. These are all given by management, so the equ 300 new fixed assets. last period's fixed assets plus proposed capital expenditures minus depreciation for the yea H . N 9 R Current assets: Cash and securities Accounts receivable Inventories Prepaid expenses Total current assets Net fixed assets Total assets How did I do this? Follow the same approach followed using ratio analysis. Note: This is the mini Since more cash will just add to the loan amount (and cost the firm money) 20 Rough estimate by management (since PPE move ertatically with sales, and since the amounts are 20 280 Based on current fixed assets, proposed capital budget, and depreciation. These are all given by m 300 new fixed assets last period's fixed assets plus proposed capital expenditures minus Liabilities and owners' equity Current liabilities Bank loan Accounts payable Current portion of long-term debt Accrued wages Total current liabilities Long-term debt Common stock Retained earnings Total liabilities and owners'equity External funding required O For now, but used to so 100 This is given and is equal to the principal repayment due during the current year 22 Rough estimate by management, same logicas PPE 660 Always equal to last year's value less current portion of long-term debt 150 CS remains constant since this company does not plan to issue new equity 1580 Retained earnings is solved for using the following equation: Retained earnings for the current yea 2390 plus earnings after tax minus dividends given the firm's retention rate (1-RR is the divide External funding = Total expected assets - (total expected liabilities + total expected owner's equity) Note: It is not uncommon for a firm experiencing decreasing cash, an increasing collectible period, and an increasing payables period to go to the bank for a lo actually needed (in this example, the company initially thought they'd need only $500,000, but they need closer to $1,4 million So, given our growth expectations, and therefore what we'll need to invest in terms of purchasing assets to take advantage of growth opportunities, external funding required is over $1,4 million Note: Show students how to perform circular calcul ons in MS Excel (first set interest expense equal to 0.10"(1994H42+H47) Or, interest expense =0.1'current portion of long-term debt + long-term debt + external funding required