Financial Statement Analysis

1. Financial Statement Analysis K R Subramanyam John J Wild

2. Prospective Analysis 9 CHAPTER

3. Importance • To forecast financial statements’ items and identify the need for an additional financing fund. • Management: forecasts of financial performance examine the viability of companies’ strategic plans; be active in a financing plan. • Creditors & investors: useful to assess a company’s ability to meet debt service requirements; useful for valuing the firm.

4. Projection Process

5. Forecast sales Sales forecasts are a function of: 1) Historical trends 2) Expected level of macroeconomic activity 3) The competitive landscape 4) New versus old store mix

6. Target Corporation Income Statements

7. Target Corporation Balance Sheet

8. Project Income statement Steps: • Project cost of goods sold and gross profit margins using historical averages as a percent of sales • Project SG&A expenses using historical averages as a percent of sales • Project depreciation expense as an historical average percentage of beginning-of-year depreciable assets • Project interest expense as a percent of beginning-of-year interest-bearing debt using existing rates if fixed and projected rates if variable • Project tax expense as an average of historical tax expense to pre-tax income

9. Project Income Statement

10. Target Corporation Projected Income Statement

11. Project Balance Sheet Steps: • Project current assets other than cash, using projected sales or cost of goods sold and appropriate turnover ratios. • Project PP&E increases with capital expenditures estimate derived from historical trends or information obtained in the MD&A section of the annual report. • Project current liabilities other than debt, using projected sales or cost of goods sold and appropriate turnover ratios. • Obtain current maturities of long-term debt from the long-term debt footnote.

12. Project Balance Sheet Notes to Financial Statements 2005: A current portion of long-term debt for 2006 is $751 mil.

13. Target Corporation Balance Sheet

14. Project Balance Sheet • The difference between total projected assets and total projected liabilities & equity will increase in cash balance. • If cash balance is too high (in percentage of sales): • Invest excess cash in marketable securities. • Reduce long-term debts. • If cash balance is too low: • Increase additional long-term debt and/or common stock.

15. Project Statement of Cash Flows • Use indirect method • Prepared from: • Projected Balance sheet • Projected Income statement