CHAPTER FINANCIAL FORECASTING FOR STRATEGIC GROWTH Expected, Learning Outcomes After studying Chapter 9, you should be able to: 1. Understand the concept and perspective of financial planning. 2. Explain the benefits that can be derived from financial planning. 3. Know the elements of a basic financial planning model. 4, Understand the determinants of a firm's growth rates. 5. Know and apply the financial planning ; process using the Projected Financial Statement Method (Percent of Sales Method). 00%CHAPTER 9 ‘AST FOR ‘NANCIAL FORECAST wa " PRATEGIC GROW INTRODUCT ION ca for financial ited reason for 1 is a commonly ¢ ; lal ctive long-range planning te hcrnatically thinking ‘nl A im Long-range planning, is a means of system ie iy hint i Sea wre an ticipating possible problems before they occur. tanning ts ab aed ‘th at at best helps the firm avoid stumbling into the caid to be A process backward i ange and growth in a firm, It shes guidelines for change and. growl ; inancial planning establishes. guic hange and growth ! d ct the big picture, which means that it is concerned with the Hea fen i : i 2 with the elements of a firm's financial and investment poli ing v individual components of those polic sin detail, WHAT IS FINANCIAL PLANNING? Financial planning formulates the way in which financial goals are to be achieved, A financial plan is this, a statement of what is to be done in the future, Many decisions have a long lead time which means they take a long time to implement. Jn an uncertain world, this requires that decisions made far in advance of their implementation, For instance, if a firm wants to build a factory in 2018, it might have to begin fining up contractors and financing in 2016 or even earlier, GROWTH AS FINANCIAL MANAGEMENT GOAL As discussed in the earlier chapters, the manager is increasing, the market value of the owners? ¢g by itself. IF the firm is successful in doing this, Growth may thus be a desirabk ‘ whe ene of good decision making but itt vend unto itself, However, whit i planning prceeaen A . © Browth rate is used j {5 considered i turing va the planning process. it inner a 8 SeveHieMt mens OF sum izing various aspe ae firm's vextment policies, | ikewise, if we think of growah ne growth in the mn, the Market value of the e Wore 88 Is of growth and increasing the not all that different, . “ppropriate goal is for the financial quity and not just growth then growth will usually result,CHAPTER 9 FINANCIAL FORECASTING FOR STRATEGIC GROWTH INTRODUCTION range planning ts 4 cornmenty cited reason for financet Hanning i a mveare of systerraatienlly thinking ible problems hefore they oceut. Planing tt ps the fire avoid eturnibling inte the fatere A lack of effective distress and failure. Lome-ram about the future and anticipating said to be a process that at best h back ward Financial planning establishes guidelines for change and arerwth it a fire. ft focuses on the big picture, which means that it is concerned with the srajer elements of a firm 9 financial and investment policies withent dealing, with the individual components of those policies in detail WHAT IS FINANCIAL PLANNING? Financial planning formulates the way in which finaticial gonts ate to be achieved. A financial plan is thus, a statesrent of yhat is to be dene in the future. Many decisions have a long lead time which menus they take m fog tine to iniplement. In an uncertain world, this requires that decisions made far itv advance of their implementation. For instance, if « firm want to build a factory in 201%, it might have to hegin lining up contractens aud financing in 2016 ct even enelier, GROWTH AS FINANCIAL MANAGEMENT GOAL As discussed in the earlier chapters, the appraptiate weal is for the finmriciat manager is increasing He market value of He nwners' equity and nat just grerwth by itself UF the firm is successful in deny this, then grennth will usually redal Creo may this be n desitable eemeruence of goeul decisim maki lat Ho nod An end unt itvell Hewever, while grawlh re is used in the planning peewee ft is considered a convenient enn of summarising vartenta wepmeta oro te financial and investment policies. Likewise, It we think uf wrevwth na srerwth in the market value of the equity i the finn, then guule of grerwth and incrensing the market value ofthe equity inte fm wre ned all that different, "Financial Forecastins PERSPECTIVE OF FINANCIAL PLANNING Growth 195 Le ee itis oflen useful to think ofthe future as having a short- 12 months while Pe ea ers the coming to five years. This time P erin over the long-run is takes to be the coming two five Year Ui ine Period referred to as the planning horizon and this is the sion of the planning process that must be established. ‘The second dimension of the planning process that needs to be determined is the level of aggregation. Aggregation involves the determination of all of the individual projects together with the investment required that the firm will undertake and adding up these investment proposals to determine the total needed investment which is treated as one big project. ‘fier the planning horizon and level of aggregation are established, a financial plan requires inputs in the form of alternative sets of assumptions about important wea ables. This type of planning is particularly important for eyelical businesses & business firms whose sales are strongly affected by the overall state of the economy or business cycles. WHAT ARE THE BENEFITS THAT CAN BE DERIVED FROM FINANCIAL PLANNING? Due to the amount spent in examining the different scenarios, and variables that will eventually become the basis for a company’s financial plan, it seems reasonable to ask what the planning process will accomplish. {ved from financial planning are the Among the more significant benefits of deri following. 1. Provides a rational way of planning options or alternatives. The financial plan allows the firm to develop, a Sn a vie aaa . a i ‘ines! ‘nan organized an consisted way rent business scenarios I od 2 ae and financing options can be explored, and their impact on the holders can be evaluat Questions concer the firm's syaluated. Questions concel ‘ning firm’s sharel ‘uture lines of busine’ s and optim: nancing arran fi f business and optima fi Options such as introducing new products oF closing plants migh be evaluated.196 Chapter 9 2. Interactions or Linkages between investment proposals are carefully examined. y the linkages The financial plan enables the proponents to show explicitly th i vities of the between investment proposals for the different operating acl! : firm and its available financing choices. For example, if the firm is planning on expanding or undertaking new investments and projects, all other relevant variables such as source, terms and timing of financing are thoroughly examined 3. Possible problems related to the proposal projects are identified actions to address them are studied. Financial planning should identify what may happen to the firm if different events take place. Specifically, it should address what actions the firm will take if expectations do not materialize and more generally, if assumptions made today about the future are seriously in error. Thus, one objective of financial planning is to avoid surprises and develop contingency plans. 4. Feasibility and internal consistency are ensured. Financial planning is a way of verifying that the goals and plans made for specific areas of a firm’s operations are feasible and internally consistent. The financial plan makes explicit the linkages between different aspects of a firm’s business such as the market share, return on equity, financial leverages, and so on. It also imposes a unified structure for reconciling goals and objectives. 5. Managers are forced to think about goals and establish priorities. Through financial planning, directions that the firm would take are established, risks are calculated and educated alternative courses of action are considered thoroughly. .. Financial __ Financial Forecasting for Strategic Growth NIT FINANCIAL PLANNING MODELS Financial planning process will diffe i fi {Yer from firm to firm, just as companies differ in size and products. U f Ss. However, 3 a ee basic financial planning model will have the 8: (4) economic environment assumptions, (b) sales foreca 1. (c) pro forma state rma statements, (d) asset requirements, (c) financial requirement, and (1) additional funds needed Soin Assumption, ‘The plan will have Ws explicitly the economic environment in which the fim exten to reside eines plan, Among the more important econ aysumption will have to be made are the inflation rates, level of interest rates a the firm’s tax rate. Sales Forecast. An externally supplied sales forecast considered the “driver” shall be the “heart” of all financial plans. The user of the planning model will supply this value and most other values will be ealeutated be sed on it, Planning will focus on projected future sales and the assels and financing needed to support those sales. as the growth rate in sales ct sales forecast are not tain future state of Oftentimes, the sales forecast will be giver rather than as an explicit sales figure. Pet possible, of course, because sales depend on the unce c the economy. To come up wilh ils projections, firms could consult with some busine Which specialize in_ macroeconomic and. industry es projections. Also, evaluating alternative scenarios does not require sales forecast to be very accurate because the financial planner’s goal is to examine the interplay between investment and financing needs at different ple sales level, i inpoint what we expect 10 happen. possil not to pinp r Determinants of ‘Growth Rates A firm's ability to sustain growth depends explicitly on the following, irm’s 8 s factors: i i fi yin will increase the yn. An increase in proiit margin perease th ° pear pane generale funds internally and thereby increase its jrm’S sustainable growth.198 3 Chapter 9 of net income paid © Dividend Policy, A decrease in the perce bol nate out as dividends will increase the retention ils Sout internally generated equity and thus increases susta v4 ‘atio increases © Financial Policy. Aw increase in the debt-equity Sarl a the firm's financial levs c. Because this makes a ainable growth rate. financing available, it increases the sustainable gro} sset turnover This © otal Asset Turnover. An increase in the firm's total _ increases the sales generated for cach peso in a a decreases the firm's need for new assets as sales grow an a eby increases the sustainable growth rate. Notice that tota| as: me thing as decreasing capital intensity. turnover is the The sustainable growth rate is a very useful planning number. What it illustrates is the explicit relationship between the firm’s four major areas of concern: (a) its operating efficiency as measured by profit margin, (b) its asset use efficiency as measured by total asset turnover, (c) its dividend policy as measured by the retention ratio, and (d) its financial policy as measured by the debt-equity ratio. Pro forma Statements. A financial plan will have a forecast statement of financial position, income statement, statement of cash flows and statement of stockholders’ equity. These are called pro forma or projected statements which will summarize the different events Projected for the future Asset Requirements. The financial plan will describe Projected capital Spending. Ata minimum, the projected statement of financial position will contain changes in total fixed assets and net working capital. These changes are effectively the firm’s total capital budget. Proposed capital spending in different areas must thus be reconciled with the overall increases contained in the long-range plan, Financial Requirements. The financial plan will include a section about the necessary financing arrangements. This part of the plan should discuss dividend policy and debt policy. Sometimes firms will expect to raise cash by selling new shares of stock or by borrowing. In this case, the plan will have to consider what kinds of securiti of issuance are most appropriate.itegic Growth 199 6. Additional Fi nal Funds No Needee oN] anvestimatelotiihe ceded (AEN). Alter the firm has a sales forecast a financing will often b anes spending on asset ena an projected total raniiaestanite because projected total assets will exceed ia A Sea jes and equity e at financial position will no ar y. In other words, the statement of nice. Because new fi ause new financing ma ee financing may be necessary 10 cove i! apital spending, a financial “plug” , Sak capil sen nail plug” variable must be selected. The plug i pee nae ees - external financing needed to deal with any a s) in financing and thereby. bri of ofall (or sur 2 ring, the stateme financial position into balance y bn he sama For example. a fi i 7 ple. firm with @ great number of investment opportunities and Jow may have to raise new equity. Other firms with few I flow will have a surplus and thus "external equity is the plug limited cash growth opportunities and ample ¢ might pay an extra dividend. In the first ¢ variable; and the second, the div idend is used: PROCESS FINANCIAL PLANNING ge their operating plans on 8 set of forecasted process begins with a sales forecast for the next tired to meet the sales targets are determined, finance the required assets. ‘At that point, al position can be projected, and be forecasted. Well run companies generally ba financial statements. T he planning five or so years- “Then the assets requ and decision is made concerning how to and statements of financt key ratios can sted statements and ratios have been prepared, 10P alistically expect. and if not. plans to produce better earnings an sults aS good a our operatingo BE harewr THE PROJECTED FINANCIAL STATEMENT METHOD Any forecast of financutl eaquires the fim will need during & catemalty du generated from the funds requ firut will gener . one simply proj he liabilities and equity ts the projected ditional funds needed The projected financial starement method is the asset requureimients for the oon that will be under 0 es capital froat the required The steps in the procedures are as follows Step 1. Forecast the Income Statement. Establish a sales projec Prepare the production schedule and project the corresponding production costs; direct materials, direct labor and overhead. Estimate selling and administrative expenses. Consider financial expenses. if any e. Determine the net profit. & en Step 2. Forecast the Statement of Financial Position. a. Project the assets that will be needed to support projected sales. b. Project funds that will be spontancously generated (through accounts payable and accruals) and by retained earnings. Project liability and stockholders’ equity accounts that will not rise spontaneously with sales (e.g.. notes payable, long-term bonds, preferred stock and common stock) but may change due to financing decisions that will be made later. d. Determine if additional funds will be needed by using the following formula. o Additional Required Spontaneous Increase in Funds Needed = Increase — Increasein — Retained in Assets Liabilities Eamings “The additional financing needed will be raised by borrowing from the benk as notes payable, by issuing long-term bonds, by selling new common stock or by some combination of these actions.__ Financial Forecasting for Strat Step 3. Raising the additional funds needed. ic Growth 201. The financing deci ancing decision will consider the following factors: a, ‘Target ; b. Effect i : eee of short-term borrowing on its current ratios cue itions in the debt and equity markets: or d. Restrictions imposed by existing debt ital structures agreements Step 4. Consider financing fi backs. Depending ‘on whether additional funds will be ‘porrowed oF will be aived through common stocks. consideration should be given on Additional interest expense in the income statement oF dividends, thus decreasing the retained earnings. Apply the iteration process using the available financing mix until the AEN would become so small that the forecast can be considered complete. Illustrative Case 9-1, Financia Forec sting (Percent of Sales Method) “The Millennium Company bts the following statements whieh are representative ar the company’s historical averse Income Statement 000 Sales P2900, 7 Cost of sales zane Gross profit = oN Operating expens a Eomings efore interest and taxes a a Interest expense Fro Eamings before taxes et Taxes (35%) Earnings after taxes 6221.50 136.500 Dividends =Cash P 50,000 Accounts recewable 400 006 pamery 190,000 Current assets 1.200.000 Fund assets (net) 800.000 Total senete 2.000.000 Liabéites and Equity Accounts payable 250,000 Accrued wages 10,000 Accrued taxes 20.000 Current babaites: 280,000 Notes payatie ~ bark 70,000 Long-term debt 160,000 Onanary shares 1,200,000 Retaned earengs __ 0,00 Total kabaibes and equity 2,008,000 The firm ts expecting a 20 percent increase in sales next year, and management is concemed about the company’s need for external funds. The increase in sales is expected to be carned out without any expanston of fixed assets, but rather through more efficvent asset utilization in the existing store. Among liabilities, only current liabilitres vary directly with sales Using the percent-of-sales method, determine whether the company has extemal financing needs or a surplus of funds Solution: Step 1 Forecast the Income Statement The projected income statement will show the following_ Financial Forecasting for Strategic Growth _W% Step 2. Forecast the Statement of Financial Position. ‘The projected statement of financial position will show the following: Assets Cash (4) P IM Accounts receivable (2) 420,000 Inventory (3) gn ’ Total current assets P 1,440,000 Fixed assets (net) (4) 200,00, Total assets 2.249.000 Liabilities and Equity Accounts payable P 30,000 Accrued wages (6) 42,000 Accrued taxes (7) 24.000 Current liabilities P 336,000 Notes payable - bank (4) 70,00 _ Long-term debt (4) 150,000 “Ordinary shares (4) 4,200, Retained earnings (8) 20, Total P2236 Additional financing required 3 . Total Supporting computations: , (1) Cash = 2.5% x P2.4M sales (2) Accounts receivable = 20% of P2.4M (3) Inventory = 37.5% x P24M (4) No percentages are computed for fixed assets, notes payable, lo term debt, ordinary shares and retained earn} because thi not assumed to maintain a direct relationship with sales volur simplicity, depreciation is not explicitly considered. , (5) Accounts payable = 12.5% of P2.4M (6) Accrued expenses = 0.5% of P2.4M (7) Accrued taxes = 1% of P2.4M (8) Retained earnings = 300,000 + P282. . For 100 - P101,6004 Ohapee # Perma Mettrond 7 Additional finascing needed (ATM) ney alse tee commpaatoed we letters — Hemed —— Sipuntanernrs terete @ Worease eee star eh iaaaad (0 aanetn Wn bates mrs where Required ; Change in Current Assets (reserty worease x © assets . ooles Hates (provers) on — Change Curera uaeeee ipreers) . peo ‘ Bates (present) in habeioes Increase Eamings Drndend inretemed = ote - Applied to Millennium Co., APN is computed as follows arn {400.000 met) {10.0004 ee.) 282.100 - 101,600 = 240,000 -96,000 - 160,600206 Chapter 9 - Additional information follows: 1. Historical sales for the last five years (ln Thousand Pesos) Year Sales 20X0 pAlb 20X1 5,066 20X2 4,964 20Xx3 5,100 20X4 6,000 20X5 6,600 (proy 2. Assets and spontaneous liabilities will increase by 10%, 3. Ordinary shares outstanding, 50,000. 4. Ordinary js are projected at P2.50 per share: 5. Market value per share at the end of 20X2 is P46.67, REQUIRED: 1. Construct the pro forma financial statements using the statement method. How much additional capital will be req firm operated at full capacity in year 20X4. Do not include fi Solution: Based on the data and assumptions given, the following projectio additional financing needed determined. Figure 9-1. Projected Income Statement (First Pass) (Thousands of Pesos) 20x4 Actual 6,000 Sales Operating costs (inclusive of P200 deprecation) Earnings boloro interest and taxes Loss interest expense Eamings before taxes Taxes (40%) ‘Net income before preference dividend Dividends to proference Nel income available to ordinary Dividends to ordinary Addition to retained ¢amingsasting for Strategic Growth 7 WKS Fe Cash Aecouris tecsivatle Inventories Total current assets Net plant and equipment Total Assets Liabilities end Equity Accounts payable Notes payable Acctuals Total current atilives Long-term bonds Total liabilities Preference Shares Ordinary shares (50,000 shares) oh Retained earnings + AE Tota Equity PLE Total Liablines and Equity oh 4 1 Additional funds needed (AFM) Pz24 Cumulative AFN R224 DISCUSSION: Figure 15-1 shows Tamarind’s actual 20X4 and forecasted 20X5 income statement. For year 20X5 earnings before interest and taxes are projected at 625,000 and earnings after taxes of £269,000. Dividends to preference shares and ordinary shares are projected at £8,000 and P125,000, respectively. Figure 15-2 comains Tamarind’s 20X4 actual and its projected 20X5 statements of financial position. Total assets are projected at P4,400,000 while the forecasted liability and equity accounts total to only 4,176,000. Since the resources or assets required to support the higher sales level exceed the available sources, it means that additional funds will have to be obtained. The ‘AEN of P224,000 will be raised by borrowing from the bank as notes payable or by issuing long-term bonds or by selling new ordinary shares, or by some combination of these actions.208 Chapter 9 actors, Tamarind decided on the U.Assume that after considering all the relevant fi following funds financing mix to raise the AFN of P2 4,000: Percent Amount Interest rate Notes payable 25% P 56,000 8% Long-term debt 25 56,000 10% Ordinary shares* 30 _112,000 ‘Total 100% 224,000 * 2,400 shares Construct the pro-forma income statement and statement of financial position to incorporate the financing feedback which results from adopting the financing mix given above. Solution: Figure 9-3. Projected Income Statement (Second Pass) For 20X5 0x4 20X5 Forecast Actual First Pass Feedback ‘Second Pass Sales 6,000 6,600 6,600 Operating costs (inclusive of 200 depreciation) 5432 5,975 5975 Eamings before interest and taxes 568 625 625 Less interest expense 176 176 + 10 198 Eamings before taxes 392 449 439 Taxes (40%) 457 480 -4 178 Net income before preference ividend 235, 269 283 Dividends to preference 8 ery 8 Net income available to ordinary P2270 261 255 Dividends to ordinary 116 125 +6 131 Addition to retained earnings 136 124210 Chapter 9 ANALYSIS OF THE FORECAST art of total forecasting, Next year’s forecast as developed above is only the first 7 process. Forecasting is an iterative process, both in the way the fi statements are generated and in the way the financial plan i planning purposes, the consultant or financial staff develops a preliminary forecast based on a combination of past policies and trends. This will serve as a starting, point or "baseline" forecast. The model is then modified to what effects: alternative operating plans would have on the firm’s earnings and finance’ condition. Likewise, alternative operating plans are examined under different sales growth rate scenarios and linked to the firm’s dividend policy and capital structure decisions. The revised forecast or model can also be used to analyze alternative working capital policies.I Chgyrer & Prodlesns Problem 1 (Pro Forma Statements) Consider the following simplified financial statements for the Phillips ¢ erporation assunting no inooAte LANes Income Statement Statement of Financial Position Sales 23,000 Assets, PIs,800 Debt ¥ 5,200 Costs Lo700 Hquity 10,600 Net income P9300 Total PLS,800 Total P1S,800 Phillips has predicted a sales increase of 15 pervent, It has predicted that every item on the statement of financial position will increase by 15 percent as well Create the pro forma statements and reconcile them. What is the additional financing needed here. Problem 2 (Calculating EFN) The most recent financial statements for Donald Inc, are shown assuming no. income taxes. Statement of Financial Position Income Statement Sales P 6,300 Assets P18300 Debt 12,400 Costs 3,890 Equity 5,900 P18300 Toul £18,300 Net income P2410 Total Assets and costs are proportional to sales. Debt and equity are not, No dividends are paid. Next year’s sales are projected to be 7,434, What is the external financing needed? Problem 3 (Calculating EFN) Statement of Financial Position Income Statement Sales P19,500 Assets 98,000 Debt 52,500 Costs 15,000 Equity 48,500 ‘axable hone P 4,500 Total 298,000 Total 98,000 Taxes (40%) __1,800 Net income —-P_2,700Problem 4 (Sales and Growth) ‘The most recent fi nt finance! cial statements for Gospel Company are shawn ty : 1 shown het Income Statement ae 42,000 osts 28,500 Taxable ae income 13,500 Taxes(4%) 4,590 Net income —-P_8,910 Financial Forecasting for St Growth 23 Statement of Financial Position Current ae P 21,000 Debt 51,000 xed Equity _ 56,000 assets __ 86,000 Total 107,000 Total Assets and costs are proportional to sales. The company maintains constant 30 percent dividend payout ratio and a constant debt-equity ratio maximum increase in sales that can be sustained assuming no new equi What is the ty is issued? Problem 5 (Calculating Retained Earnings from Pro Forms Income) Consider the following income statem Dividends Addition 0 retained earnings A 20 perce” growth rate in 5 statement ass What is the proj sts va jected addition yet vent for Jordan Corporation: Jordan Corporation Income Statement ales 15 projected Prepare & pro forma income jth sales and the dividend pay out ratlo constant, nod eats”214 Chapter 9 Problem 6 (Applying Percentage of Sales) The statement of financial position for Jordan Corporation follows. Based on this information and the income statement 1 problem 5, supply the missing, information using the percentage of sales approach, Assume that accounts payable s notes payable do not, Put “fa” where needed vary with sales, whe Jordan Corporation Statement of Financial Position Assets. Liabilities and Owners’ equity P Percentage P Percentage of Sales of Sales Current Current assets liabilities Cash P 3,050 : Accounts Accounts ~ payable P1300 receivable 6.900 Notes Inventory 7,600 siéayablle 6,800 Total ___ Total P 8,100 Long-term Fixed assets debt 251000 pemeameae Net plant and equipment P34,500 Owners? ~~ equity Common stock and paid-in surplus 15,000 _ _ Retained earnings 3,950 __ Total P18950 Total liabilities and owners’ Total assets 52,050 equity P52,050 =Financial Forecasting ark ; ir ul sting for Strategic Growth 2s (External Financing Requirements) Consider the followi mn ement for sider lowing statemer i conis Company ment of financial position and income staten it fe Statement of f rear december of Financial Position as of December 31, 20X4 (in thousands of pesos) Assets, Cash Liabilities and Owners equity Accounts Receivables P80 Accounts payable p 160 Accruals 40 Inventory a Notes payable 252 Total current assets a0 Total current rigadcabe P1010 hhabilities p 452 : 3.200 Long-term debt 1244 Total debt 1,696 Common stock 1,605 Retained earnings 939 Total liabilities and ‘Total assets 4240 equity p4,240 Lewis Company Income Statement for the Years Ended December 31, 20X4 {in thousands of pesos) Sales 8,000 Operating costs 78 EBIT ‘150 Interest Pr 400 EBT 160 Taxes (40%) Pose Net income as + Per share data 716.96 Common roel price p 1.60 Earnings per shat re (EPS) p 104 Bividerd per share (DPS)216 Chapter 9 __ Required: a. The firm operated at full capacity in 20X4. It expects sales to increase by 20 percent during 20X5 and expects 20X5 dividends per share to incr P1.10. Use the projected financial statement method to determine how much outside financing is required, developing the firm’s pro forma statement of financial position and income statement, and use AFN as balancing item b. If the firm must maintain a current ratio of 2.3 and a debt ratio of 40 percent, how much financing, after the first pass will be obtained using notes payable, long-term debt, and common stock? Make the second pass financial statements incorporating financing using the ratios in (b), Assume that the interest rate on debt av percent. backs, ges 10 2 Problem 8 (Long-term financing needed) At year-end 20X4, total assets for Geneva Corporation were P1.2 million a accounts payable were P375,000. Sales, which in 20X4 were P2.5 million, a expected to increase by 25 percent in 20X5. Total assets and accounts payabl proportional to sales and that relationship will be maintained. Geneva typically uses no current liabilities other than accounts payable. Common stock amounted to P425,000 in 20X4 and retained earnings were P295, 00. Geneva plans to sell new common stock in the amount of P75,000. The firm’s profit margin on sales is 6 percent: 40 percent of earnings will be paid out as dividends. Required: a. What was Geneva’s total debt in 20X4? b. How much new, long-term debt financing will be needed in 20X5?* roblem Financial Pp 9 (Additional Punds Needed) ) Hannah Company's e y"s sales are fore: in 20XS. Here is the December > increase fi en s the December 31, 20.4 ee orn 1-090 in 204 102,000 Statement of Financial Position {in thousands of pesos) Assets Cash * Liabilities and Stockholders’ Equity Aecours ecb ace aia ie a (65 payable. nnn . 180 es 200 Accruals . a so he tae P $00 Current liabilities . P 250 a cue $00 Long-term debt ... oe) Common stock 100 Retained earnings..... . —250 Total liabilities and Total assets ..... seoue 1,000 stockholders” equity...» 1,000 Hannah's fixed assets were used to only 50 percent of capacity during 20X4, but its current assets were at their proper levels. Allassets except fixed assets increase at the same rate as sales, and fixed assets would also increase at the same rate if the current excess capacity did not exist. Hannah's after-tax profit margin is Forecasted to be 5 percent, and its payout ratio wil be 60 percent. What is Hannah's additional funds needed (AFN) for the coming year? Problem 10 (Additional Funds Needed) ment of financial position of ‘Marbell Company for 20X4 Marbell Company Statement of Financial Position ‘As of December 31, 20X4 (in thousands ‘of pesos) The following is the state Liabilities and Stoc! pon a 150. Accounts payable ener ‘90 Notes payable Accounts receivable “60 Accrued expenses Inventory. preso Current liabilities Current assets "600 Fixed assets. = Common stock. Retained earings . ‘Total liabilities and pa2s stockholders’ eated fo increase Sales for 20X4 were P3,000,000, Sales for 20X5 have been proj by 20%. Assuming that Marbell Company is operating below capacity, calculate the amount of new funds to finance growth, Marbell has an 8% return on sales and 70% is paid out as dividends. ales method) Problem 11 (Per provinces, Sonny’s Electronics has 90 operating, plants in seven southwestern Sales for last year were P100 million, and the statement of financial position at year-end is similar in percentage of sales to that of previous years (and this will continue in the future), All assets (including fixed assets) and current liabilities will vary directly with sales. Statement of Financial Position (in P millions) Liabilities und Stockholders’ Equity Accounts payable coe PIS Accrued taxes Current liabilitie: Notes payable Common stock... Retained earnings ... Total liabilities and P8S, stockholders’ equity... Inventory..... Current assets Fixed asset Total assets ... Sonny’s has an aftertax profit margin of 7 percent and a dividend payout ratio of 40 percent. nt next year, determine how much of new funds are If sales grow by 10 perce needed to finance the growth,Financial Fore asting for Strategic Growth 219 Problem 12 (Percent-of-sales metho er (P ‘sales method) Penstore, I nc., a nation: al cl busines his ¢ sted net Sane chain, had sales of P300 million | pee acne it margin of § percent and a divi east 25 eee dividend payout ratio of perc position for the end of last year is shown Statement of Fi statement of Financial Position End of Year (P millions) Liabilities and Stockholders’ Eauiny Cash. Assets as cama receivable... aed peas aaa aon saree iAcerued EXPENSES 2 20 Pet and oo ‘Other payables 30 pment Common stock. w Retained earni ee 8D Total liabilities and p24o pogo stockholders’ eat Total assets ---- coming year there The company’s marketing s staff has told the president that in the and for coats and slacks. A sales increase of 15 will be a large inerease in the dem percent is forecast for the company- same percent ined earnings {anding, and olicy of the are expected to maintain the cept for common stock and retal of common SI ack shares owls cd by the her and dividend P i percent.) yy during the eo" ancia ps as last uted in th ment of fin lion chedu Allstate ic ‘unt ming yea rofit margin Went UP id to 50 percent? for the compan cing be" sing if the net P jas incre