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CHAPTER 17 Financial Planning and Forecasting

CHAPTER 17 Financial Planning and Forecasting. Outline. AFN : Additional funds needed Income statement : from sales to net income Sales COGS and Gross Margin Expense and Operating Margin Net income and EPS Balance sheet: Increased assets to support increased sales

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CHAPTER 17 Financial Planning and Forecasting

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  1. CHAPTER 17Financial Planning and Forecasting

  2. Outline • AFN: Additional funds needed • Income statement: from sales to net income • Sales • COGS and Gross Margin • Expense and Operating Margin • Net income and EPS • Balance sheet: • Increased assets to support increased sales • Increased liability and equity to fund increased assets

  3. Key Assumptions in Preliminary Financial Forecast for NWC Operating at full capacity in 2012. Each type of asset grows proportionally with sales. Payables and accruals grow proportionally with sales. 2012 profit margin (2.52%) and payout (30%) will be maintained. Sales are expected to increase by $500 million. (%DS = 25%)

  4. Preliminary Financial Forecast:Balance Sheets (Assets)

  5. Preliminary Financial Forecast: Balance Sheets (Liabilities and Equity)

  6. Preliminary Financial Forecast: Income Statements

  7. Key Financial Ratios

  8. Determining Additional Funds Needed Using the AFN Equation AFN = projected increase in assets-Spontaneous increase in liabilities-increase in retailed earnings (A0*/S0)S – (L0*/S0)S – M(S1)(1 – Payout) = ($1,000/$2,000)($500) – ($100/$2,000)($500) – 0.0252($2,500)(0.7)= $180.9 million Notes: ΔS –change in sales, M-Net Profit margin. A0*/S0:asset to sales ratio(capital intensity ratio), at full capacity, A0 is total assets. L0*: spontaneously generated liability

  9. An example-WMT

  10. Determining Additional Funds Needed Using the AFN Equation AFN = projected increase in assets-Spontaneous increase in liabilities-increase in retailed earnings (A0*/S0)S – (L0*/S0)S – M(S1)(1 – Payout)=?

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