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Forecasting
Chapter 4
Why the need To maximize stock price
for financial To reduce information asymmetry
To maximize gains and minimize losses
Forecast Horizon
Percent of Sales Method
Total Sales = Sales Price per unit * # of units
In creating the Sales forecast, one has to consider
population
growth (demand) and inflation.
Thus it is possible that even if unit selling price is
forecasted
increase to inflation, the demand or # of units sold
due to
willdecrease.
If long term growth rate is 5%, _________ is what we call
the^c}ueiie adavage ei}d_
Year 2011 2012 2013 2014 2015 2016
Unit Selling Price 10.00 10.50 10.92 11.25 11.59 11.93
Number of Units 10,000 11,000 11,880 12,474 12,225 12,347
Inflation rate 5% 4% 3% 3% 3%
Demand growth rate 10% 8% 5% -2% 1%
Sales 100,000 115,500 129,730 140,303 141,621 147,329
Growth rate (Total) 15.50% 12.32% 8.15% 0.94% 4.03%
Forecasted Income Statement
(in thousands)
Actual (2011) Forecast Basis Forecast (2012)
Sales 1,500,000.00 1.2 1
,800,000.00
Costs except depreciation 500,000.00 0.333 600,000.00
Depreciation 80,000.00 0.053 96,000.00
Total Operating Costs 580,000.00 696,000.00
EBIT 920,000.00 1
,104,000.00
Interest 48,200.00 48,200.00
EBT 871,800.00 1
,055,800.00
Taxes (40%) 348,720.00 422,320.00
NI before preferred dividends 523,080.00 633,480.00
Dividends to preferred 50.00 50.00
NI available to common 523,030.00 633,430.00
Dividends to common 500,000.00 550,000.00
Addition to retained earnings 23,030.00 83,430.00
Additional Information:
8% Bonds Payable, at par 565 million 2011 Net Plant and Equipment 800 million
5% Notes Payable 60 million 2012 Net Plant and Equipment 960 million
1% Preferred Stock 5million Annual Depreciation Rate 10%
# of Common Stock Outstanding 50 million Dividend per share in 2011 is 10
Dividend per share is expected to increaseSales
by 10%
is expected to increase by 20%
Why BS items may be based on
Sales Companies exist and
operate to earn PROFITS
Used when Capital Intensity Ratio (A*/So) is
not constant
Simple Linear Regression
If the estimated relationship between
inventories and sales is: Inventories = t
,000
150 + 0.175 (Sales), and projected sales
for 2011 is 1,800,000; thus, the projected
inventories will be _______.
If the estimated relationship between
receivables and sales is: Receivables =
27,000
+ 0.045 (Sales), and projected sales for
2011 is thus, the projected receivables
1,800,000;
willbe _______.
Simple Linear Regression
Over the past four years, a well-managed company has
had the link between its inventories and its sales:
following
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How would the following items
affect the AFN?
Higher dividend payout ratio?
Increase AFN: Less retained earnings.
Higher profit margin?
Decrease AFN: Higher profits, more retained earnings.
Higher capital intensity ratio?
Increase AFN: Need more assets for given sales.
Pay suppliers in 60 days, rather than 30 days?
Decrease AFN: Trade creditors supply more capital
(i.e., L*/S0 increases).
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Problems in the Book
4-1 to 4-3: AFN Equation
4-5: Excess Capacity
4-7: Pro Forma Income Statement
4-8: Long-term Financing Needed
4-9: Sales Increase