Financial Forecasting

Question 1

Percent of Sales Method

Answer 1

1. Project Sales Revenue & Expenses
2. Forecast Change in spontaneous balance sheet accounts
3. Deal with Discretionary accounts
4. Calculate retained earnings
5. Determine total financing Need/Assets
6. Calculate the firms future Discretionary Financing Need (DFN)

Question 2

Spontaneous accounts

Answer 2

Current Assets, Accrued expenses, and accounts payable

Question 3

Discretionary Accounts

Answer 3

Longer term debt, notes payable and common stock

Question 4

Fixed Assets

Answer 4

Only changes automatically if the firm is operating at capacity.

Question 5

Dealing with Retained Earnings (RE)

Answer 5

1. Projected RE = Old RE + Change in New RE
2. Projected RE = Old RE + NI-dividends
3. Projected RE = Old RE + ((Projected sales x net margin) x (1-Payout Ratio))

Question 6

dividend payout ratio

Answer 6

dividends/ net income

Question 7

Retention or plowback ratio

Answer 7

1 - Dividend Payout Ratio /

Question 8

Discretionary Financing Needed

Answer 8

projected total assets - projected total liabilities - projected owners equity

Question 9

How to Decrease DFN

Answer 9

1. Slow Sales Growth
2. Examine Capacity Constraints
3. Lower dividend Payout
4. Increase Net Margin

Question 10

Sustainable growth is a funciton of

Answer 10

Profitability (Net Margin)
Asset usage efic (asset Turn)
Leverage (assets/equity)
Plowback (divid policy)

Question 11

SGR (Sustainable growth rate )

Answer 11

Ni/S x S/A x A/E x (1-(div/Ni)