The document discusses forecasting financial statements using the percentage of sales approach. It provides an example of forecasting a company's balance sheet for the next year based on the current year's percentages of sales. The company's projected sales are forecast to increase to $25 million from the current year of $20 million. The document walks through estimating each line item on the balance sheet as a percentage of the projected sales. It then calculates the discretionary financing needed and provides options for raising that amount.
The document discusses forecasting financial statements using the percentage of sales approach. It provides an example of forecasting a company's balance sheet for the next year based on the current year's percentages of sales. The company's projected sales are forecast to increase to $25 million from the current year of $20 million. The document walks through estimating each line item on the balance sheet as a percentage of the projected sales. It then calculates the discretionary financing needed and provides options for raising that amount.
The document discusses forecasting financial statements using the percentage of sales approach. It provides an example of forecasting a company's balance sheet for the next year based on the current year's percentages of sales. The company's projected sales are forecast to increase to $25 million from the current year of $20 million. The document walks through estimating each line item on the balance sheet as a percentage of the projected sales. It then calculates the discretionary financing needed and provides options for raising that amount.
The document discusses forecasting financial statements using the percentage of sales approach. It provides an example of forecasting a company's balance sheet for the next year based on the current year's percentages of sales. The company's projected sales are forecast to increase to $25 million from the current year of $20 million. The document walks through estimating each line item on the balance sheet as a percentage of the projected sales. It then calculates the discretionary financing needed and provides options for raising that amount.
Discretionary Financing Needed. l Discuss Limitations of Percentage of Sales Approach. l Determine Sustainable Growth Rate. l What’s a cash budget? l 1)Project sales revenues and expenses. l 1) Project sales revenues and expenses. l 2) Estimate current assets and fixed assets necessary to support projected sales. l 1) Project sales revenues and expenses. l 2) Estimate current assets and fixed assets necessary to support projected sales. – Percent of sales forecast l Suppose this year’s sales will total $20 million. l Next year, we forecast sales of $25 million. l Net income should be 10% of sales. l Dividends should be 40% of earnings. l Our task: forecast balance sheet and determine discretionary (outside) financing needed. This year % of $20m Assets Current Assets $6m 30% Fixed Assets $10m 50% Total Assets $16m Liab. and Equity Accounts Payable $3m 15% Accrued Expenses $2m 10% Notes Payable $1m n/a Long Term Debt $3m n/a Total Liabilities $9m Common Stock $4m n/a Retained Earnings $3m Equity $7m Total Liab. & Equity $16m Next year % of $25m Assets Current Assets 30% Fixed Assets 50% Total Assets Liab. and Equity Accounts Payable 15% Accrued Expenses 10% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets 50% Total Assets Liab. and Equity Accounts Payable 15% Accrued Expenses 10% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets Liab. and Equity Accounts Payable 15% Accrued Expenses 10% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable 15% Accrued Expenses 10% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses 10% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable n/a Long Term Debt n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.00m n/a Long Term Debt $3.00m n/a Total Liabilities Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.00m n/a Long Term Debt $3.00m n/a Total Liabilities $10.25m Common Stock n/a Retained Earnings Equity Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.00m n/a Long Term Debt $3.00m n/a Total Liabilities $10.25m Common Stock $4.00m n/a Retained Earnings Equity Total Liab. & Equity l Next year’s projected retained earnings = last year’s $3 million, plus: l Next year’s projected retained earnings = last year’s $2 million, plus:
projected net income cash dividends
sales sales net income l Next year’s projected retained earnings = last year’s $3 million, plus:
projected net income cash dividends
sales sales net income
$25 million x .10 x (1 - .40)
l Next year’s projected retained earnings = last year’s $3 million, plus:
projected net income cash dividends
sales sales net income
$25 million x .10 x (1 - .40)
Proj. RE = $3m + $1.5m = $4.5 million
Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.00m n/a Long Term Debt $3.00m n/a Total Liabilities $10.25m Common Stock $4.00m n/a Retained Earnings $4.50m Equity $8.50m Total Liab. & Equity Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.00m n/a Long Term Debt $3.00m n/a Total Liabilities $10.25m Common Stock $4.00m n/a Retained Earnings $4.50m Equity $8.50m Total Liab. & Equity $18.75m l Projected Assets $20.00m l Projected Liabilities & Equity $18.75m l Discretionary Financing Needed $1.25m l Zippy must decide how to raise this financing. l Options: short and/or long term borrowing, sell new common stock, cut dividends. l Let’s assume Zippy will borrow an additional $0.25m through Notes Payable and an additional $1m through Long Term Debt. l Here’s Zippy’s complete projected balance sheet. Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.25m 1m+0.25m Long Term Debt $4.00m 3m+1m Total Liabilities $11.5m Common Stock $4.00m Whew! n/a Now, Retained Earnings $4.50m the Accy Police will be happy! Equity $8.5m Total Liab. & Equity $20.0m l The formula approach gives the same result as our first approach, but focuses on the projected changes in the balance sheet. l DFN = Proj. Inc. in Assets – Proj. Inc. in Liab – Proj Retained Earnings – Proj. Inc in Assets = Assetst/Salest x Chg in sales – Proj Inc in Liab = Liabt/Salest x Chg in Sales – Proj. RE = NPM x Proj Sales x (1 – b), where b is dividend payout ratio = Divs/Net Income l Change in sales = 25m – 20m = 5m l Original sales = 20m l Change in Assets = (16m/20m) x 5m = 4m l Change in Liab = (3m+2m)/20m x 5m = 1.25m l Projected RE = 10% x 25m x (1-.4) = 1.5m l DFN = 4m – 1.25m – 1.5m = 1.25m l Recall, Zippy’s original DFN is 1.25m. l What if Zippy’s profit margin was expected to be only 5%? l What if Zippy’s profit margin was the original 10%, but it’s dividend payout ratio is only expected to be 30%? l What if Zippy’s sales are expected to increase to $28 million with original assumptions of 10% profit margin and 40% dividend payout ratio? l Change in sales = 25m – 20m = 5m l Original sales = 20m l Change in Assets = (16m/20m) x 5m = 4m l Change in Liab = (3m+2m)/20m x 5m = 1.25m l Projected RE = 5% x 25m x (1-.4) = 0.75m l DFN = 4m – 1.25m – 0.75m = $2m l Lower profit margin = more DFN l Change in sales = 25m – 20m = 5m l Original sales = 20m l Change in Assets = (16m/20m) x 5m = 4m l Change in Liab = (3m+2m)/20m x 5m = 1.25m l Projected RE = 10% x 25m x (1- .3) = 1.75m l DFN = 4m – 1.25m – 1.75m = $1m l Lower dividend payout ratio = less DFN l Change in sales = 28m – 20m = 8m l Original sales = 20m l Change in Assets = (16m/20m) x 8m = 6.4m l Change in Liab = (3m+2m)/20m x 8m = 2m l Projected RE = 10% x 28m x (1- .4) = 1.68m l DFN = 6.4m – 2m – 1.68m = $2.72m l Higher Projected Sales = more DFN l The maximum sales growth rate a firm can have while maintaining its capital structure (financing mix). g* = ROE (1 - b) where
b = dividend payout ratio
(dividends / net income) ROE = return on equity (net income / common equity) or g* = ROE (1 - b) where
b = dividend payout ratio
(dividends / net income) ROE = return on equity (net income / common equity) or
net income sales assets
sales assets common equity This year % of $20m Assets Current Assets $6m 30% Fixed Assets $10m 50% Total Assets $16m Liab. and Equity Accounts Payable $3m 15% Accrued Expenses $2m 10% Notes Payable $1m n/a Long Term Debt $3m n/a Total Liabilities $9m Common Stock $4m n/a Retained Earnings $3m Equity $7m Total Liab. & Equity $16m l Original Total Assets: $16m, Original Total Debt: $9m l Original Debt Ratio: 9/16 = 56.25% l Current Net income is 10% of $20m or $2m. l Current Equity = $7m l Dividend payout ratio = 40% or .4 l G = 2m/7m x (1-.4) = 28.6% x .6 = 17.1% l Our forecast for Zippy: 25% growth in sales (20m to 25m) with the following balance sheet. Next year % of $25m Assets Current Assets $7.5m 30% Fixed Assets $12.5m 50% Total Assets $20.0m Liab. and Equity Accounts Payable $3.75m 15% Accrued Expenses $2.50m 10% Notes Payable $1.25m 1m+0.25m Long Term Debt $4.00m 3m+1m Total Liabilities $11.5m Common Stock $4.00m Whew! n/a Now, Retained Earnings $4.50m the Accy Police will be happy! Equity $8.5m Total Liab. & Equity $20.0m l Projected Total Assets: $20m l Projected Total Debt/Liabilities: $11.5m l Projected Debt Ratio = 11.5/20 = 57.5%
l Since the projected growth rate of 25% is
greater than the sustainable growth rate of 17.1%, the debt ratio increases from 56.25% to 57.5%. l Budget: a forecast of future events. l Budgets indicate the amount and timing of future financing needs. l Budgets provide a basis for taking corrective action if budgeted and actual figures do not match. l Budgets provide the basis for performance evaluation. l Don’t worry about constructing cash budgets! l Omit problems 4-6a and 4-11a
