Chapter 8 Homework 1

Sandra Whyatt
Financial Analysis
BUS2050XA
Instructor: Melinda Swigart
Week 8 Homework
Chapter 8 Homework 2

Answer the following questions:

Chapter 9
Exercise 9-2 Forecasting Sales and Net Income
Quarterly Sales and net income data for General Electric for Year 1 through Year 9 are shown
below ($ millions).
Use these data and any other historical information available to forecast sales and net income for
each of the quarters ending September Year 9, December Year 9 March Year 10 and June Year
10. Explain the basis of your forecasts.
Chapter 8 Homework 3

Change Change Change Change Change in Change Change Change

In Dec In Dec In March In March June In June In Sept. In Sept

Date Sales N.I. Sales NI Sales NI Sales NI Sales NI

Dec-Y1 $ 17,349.00 1,263.00
Mar-Y2 $ 12,278.00 964.00
Jun-Y2 $ 13,984.00 1,130.00
Sep-Y2 $ 13,972.00 996.00
Dec-Y2 $ 16,040.00 1,215.00 (1,309.00) (48.00)
Mar-Y3 $ 12,700.00 1,085.00 422.00 121.00
Jun-Y3 $ 14,566.00 656.00 585.00 (474.00)
Sep-Y3 $ 14,669.00 1,206.00 697.00 210.00
Dec-Y3 $ 17,892.00 1,477.00 1,852.00 262.00
Mar-Y4 $ 12,621.00 1,216.00 (79.00) 134.00
Jun-Y4 $ 14,725.00 1,554.00 159.00 898.00
Sep-Y4 $ 14,442.00 1,457.00 (227.00) 251.00
Dec-Y4 $ 17,528.00 1,685.00 (364.00) 208.00
Mar-Y5 $ 14,948.00 1,372.00 2,327.00 153.00
Jun-Y5 $ 17,630.00 1,726.00 2,905.00 172.00
Sep-Y5 $ 17,151.00 1,610.00 2,709.00 153.00
Dec-Y5 $ 19,547.00 1,865.00 2,019.00 180.00
Mar-Y6 $ 16,931.00 1,517.00 1,983.00 145.00
Jun-Y6 $ 18,901.00 1,908.00 1,271.00 182.00
Sep-Y6 $ 19,861.00 1,788.00 2,710.00 178.00
Dec-Y6 $ 22,848.00 2,067.00 3,301.00 202.00
Mar-Y7 $ 19,998.00 1,677.00 3,067.00 160.00
Jun-Y7 $ 21,860.00 2,162.00 2,959.00 254.00
Sep-Y7 $ 21,806.00 2,014.00 1,945.00 226.00
Dec-Y7 $ 24,876.00 2,350.00 2,028.00 283.00
Mar-Y8 $ 22,459.00 1,891.00 2,461.00 214.00
Jun-Y8 $ 24,928.00 2,450.00 3,068.00 288.00
Sep-Y8 $ 23,978.00 2,284.00 2,172.00 270.00
Dec-Y8 $ 28,455.00 2,671.00 3,579.00 321.00
Mar-Y9 $ 24,062.00 2,155.00 1,603.00 264.00
Jun-Y9 $ 27,410.00 2,820.00 2,482.00 370.00
Average
Change
for each
quarter 1,586.57 201.14 1,683.43 170.14 198.00 241.43 1,667.67 214.67
Forecast
Sep. Y9 $ 25,645.67 $ 2,498.67
Forecast
Sep. Y9 $ 30,041.57 $ 2,872.14
Forecast
Mar Y-10 $ 25,745.43 $ 2,325.14
Forecast
Jun Y-10 $ 29,328.00 $ 3,061.43

Most recent actual quarter + average change for the quarter.

Note: Reported quarterly sales and net income for General Electric are:
Sales Net Income
Sep Y9 $ 27,200.00 $2,653.00
Dec Y9 $ 32,855.00 $3,089.00
Mar Y10 $ 29,996.00 $2,592.00
9-3 Forecasting Sales and Net Income
a. Explain how predictions of the total market and market share can be used in the
forecasting process.
Chapter 8 Homework 4

There are several methods used to assess and forecast demand, however, none yields
demand numbers that are 100% guaranteed successful. Using more than one method
can be proven helpful in improving forecast accuracy and assurance. To illustrate how
predictions of market share and total market sales can be used in the forecasting
process, consider the following example. If an analyst, predicts that Cough.com will
maintain its 0.08% share of the market for children’s cough medicine and total
industry sales of children’s cough medicine for year 2006 $3.2 billion, then a
reasonable estimate of Cough.com’s year 2006 sales is $2.56 million. This is
computed as 0.08/% market share multiplied by the expected $3.2 billion of industry
sales.
b. What data might you seek to enhance your sales forecast and how might such data be
gathered?
To forecast market demand for a product, market size research must be combined
with product-specific information. To develop effective targeting strategies and
manage marketing efforts companies must be good at both measuring current market
demand and forecasting future demands. Overly optimistic estimates of current or
future demand can result in costly overcapacity or excess inventories. While
underestimating demand can mean missed sales and profit opportunities. All relevant
data should be sought out, subject to cost-benefit considerations, in the prediction of
sales. The importance of sales to predictions of financial performance and financial
conditions cannot be exaggerated. However, companies invest considerable research
and effort in predicting sales. Regarding what types of data to seek and how to obtain
them, consider a retailer. To project the sales of a retailer, an analyst might consider
visiting outlets that sell the retailers’ products and observe customer-buying patterns
versus the patterns observed for key competing products. This action can be done
using circumstantial observation or using formal statistical sampling depending upon
the analysts’ perceived need for accuracy. Moreover, the analyst can seek information
from insiders via interview or interpretation of formal or informal disclosures made
by the company. The analyst can also review company strategies and industry trends.
In sum, good predictions involve more than sophisticated models.
c. Illustrate what-if scenarios in which market share gained by Cough.com is (1) 5% greater
than and (2) 5% worse than the predicted .08% of the year 2006 expected industry
sales of 3.2 billion.
Relying on predicted year 2006 total industry sales of 3.2 billion the sales of
Cough.com are predicted to be as follows:
2006 Market share of 5% greater 2006 Market share is 5% worse
{105% x.08%}x$3.2 billion {95%x008%}x3.2 billion
=$2.688 million =$2.432 million

d. For each of these two separate scenarios, illustrate what –if analysis when total expected
industry sales of $3.2 billion are (1) 10% greater than and (2) 10% worse than
expected.

What-if industry sales are 10% Greater:

{105%x.08%} x {110%x3.2 billion} {95%x.08%} x {110%x3.2 billion}
=$2.9568 million =$2.6752 million
Chapter 8 Homework 5

What if industry sales are 10% worse:

{105%x.08%} x {110%x3.2 billion} {95%x.08%} X{90%X3.2billion}
=$2.4192 million = $2.1888 million

9-4 Preparing a Short-Term Cash Forecast

The Lyon Corporation is a merchandising company. Prepare a short=term cash forecast for July
of Year 6 following the format of Exhibit 9A.4. Selected financial data from Lyon Corporation as
of Julyu 1 of Year 6 are reproduced below (thousands).
Lyon Corporation
Cash forecast
for July, Year 6

Beginning Cash Balance $20

Cash Collections
Beginning accounts receivable
20
Sales for month 150
170
Less: Ending accounts receivable
21 149
Cash available 169
Cash disbursements
Beginning accounts payable
18
Purchases (note a) 115
133
Ending accounts payable29(25% of104purchases)
Miscellaneous outlays 11
Cash balance 54
Minimum cash balance desired 30
Excess cash 24
{a} Ending inventory 15
Cost of goods sold (5/ 6 of sales) 125
140
Less beginning inventory -25
Purchases 115

Problem 9-1 Preparing Pro Forma Financial Statements

a. Use ate following ratios to prepare a projected income statement, balance sheet and
statement of cash flows for Year 3.

Coca-
Cola
INCOM Year 3 Year 2 Year 1
E Estimate
STATEM
Chapter 8 Homework 6

ENT
$ $ $
Net sales 20,297 20,092 19,889
Cost of 6
goods ,106 6,044 6,204
Gross 14 14 13
profit ,191 ,048 ,685
Selling
general
and
administr
ative 7
expense ,972 7,893 9,221
Deprecia
tion &
amortizat
ion
expense 863 803 773
Interest
expense (66) (308) 292
Income
tax 1
expense ,620 1,691 1,222
Net 3
income ,802 3,969 2,177
Outstand
ing 3
shares ,491 3,491 3,481

Ratios
Sales
growth 1% 1%
Gross
Profit
Margin 6992% 6992%
Selling
General
&
Administ
rative
Exp/Sale
s 39% 39%
Deprecia 12% 12%
tion
(depn
exp/pr yr
Chapter 8 Homework 7

PPE
gross)
INT
(int/pr yr
LTD) -545% -545%
Tax (Inc
tax/Pre-
tax Inc.) 2988% 2988%

BALAN
CE Year 3
SHEET Estimate Year 2 Year 1
$ $ $
Cash 587 1,934 1,892
Receivab 1
les 1,901 1,882 ,757
Inventori 1
es 1,066 1,055 ,066
2, 2, 1,
Other 300 300 905
Total
current 6
assets 5,854 7,171 ,620

Property,
plant &
equipme 6
nt 8,305 7,105 ,614
Accumul
ated
depreciat (3 (2 (2
ion ,515) ,652) ,446)
Net
property
&
equipme 4
nt 4,790 4,453 ,168
Other 10 10 10
assets ,793 ,793 ,046
Total 21 22 20
assets ,438 ,417 ,834

Accounts 3
payable 3,717 3,679 ,905
Chapter 8 Homework 8

U
accured
liabilities
Short-
term debt 4
& cmltd 3,899 3,899 ,816
Income
taxes 815 851 600
Total
current 9
liabilities 8,431 8,429 ,321

Deferred
income,
taxes & 1
other 1,403 1,403 ,362
Long-
term debt 1,219 1,219 835
Toatl 11 2
liabilities ,053 2,622 ,197

Common
stock 873 873 870
Capital 3
curplus 3,520 3,520 ,196
Retained 19 20 18
earnings ,674 ,655 ,543
Treasury 13 13 13
Stock ,682 ,682 ,293
Sharehol
der 10 11 9
equity ,385 ,366 ,316
Total
liabilities
& net $ $ $
worth 21,438 22,417 20,834

RATIOS
AR turn 10.68 10.68 11.32
INV turn 5.73 5.73 5.82
AP turn 1.64 1.64 1.59
Tax Pay
(Tax
pay/tax
exp) 50.33% 50.33% 49.10%
FLEV 2.06 1.97 2.24
Chapter 8 Homework 9

$ $ $
Div/sh 1.37 1.37 1.21

CAPEX 1200 1188 1165

CAPEX/
Sales 5.91% 5.91% 5.86%

Stateme
nt of
Cash Year 3
Flows Estimate
Net
income 3802
Deprecia
tion 863
Accounts
receivabl
e -19
Inventori
es -11
Accounts
Payable 38
Income
taxes -36

Net cash
flow
from
operation
s 4636

CAPEX -1200
Net cash
flow
from
investing
activities -1200

Long
term debt 0
Addition
al paid in
capital 0
Dividend
s -4783
Chapter 8 Homework 10

Net cash
flow
from
financing
activities -4783

Net
change
in cash -1347
Beginnin
g cahs 1,934
Ending
cash 587

b. Based on your initial projections, how much external financing (long-term debt and/or
stockholders’ equity) will Coca Cola need to fund its growth at projected increases in
sales?
Based on our initial projection of Coca=Cola’s balance sheet, it appears that the company
will require approximately $1.5 billion of external financing in Year 3. This amount will
yield a cash balance of approximately $2 billion and will be consistent with prior years.
Case 9-1Forcasting Pro Forma Financial Statements (Kodak)
a. All financial ratios remain at 20xy levels.
b. Kodak will not record restructuring costs for 20x7
c. Taxes payable are at the 20x6 level of $544 million.
d. Depreciation expense charged to SG&A is $765 million and $738 million for 20x6,
respectively.
e. Gross PPE is $12,982 million and $12,963 million for 20x6 and 20x5, respectively
f. Projected current maturities of long-term debt are $13 million for 20x7.

Kodak
INCOM
E
STATE
MENT 20x7 20x6 20x5
Net
sales 12515 13234 13994
Cost of goods 8199 8670 8375
Gross profit 4316 4564 5619
Selling
general
&
administ
Chapter 8 Homework 11

rative
expense
(except
deprecia
tion) 1761 1862 1776
Depreci
ation
expense 766 765 738
Researc
h&
develop
ment
cost 737 779 784
Goodwil
l
amortiza
tion 0 154 151
restructu
ring
costs
(credits) 0 659 -44
Earnings
from
operatio
ns 1052 345 2214
Interest expense 208 219 178
Other
expense
(income
) 827 108 2132
Income before
tax 18 18 -96
Income
tax
expense 827 108 2132
Net Income 245 32 725
Outstanding
shares 582 76 1407
290 290 290
RATIO
S
SALES
GROWTH -5.43% -5.43%
Gross Profit
Margin 34.49% 34.49%
Selling 14.07% 14.07%
Chapter 8 Homework 12

General
&
Adminis
trative
Exp/Sal
es
DEPRE
CIATIO
N
(DEPN
EXP/PR
YR PPE
GROSS) 5.90% 5.90%
R&D/Sales 5.89% 5.89%
INT
(int/pr
yr STD
and
LTD) 6.49% 6.49%
Tax (Inc
Tax/Pre-
tax Inc) 29.63% 29.63%

BALANCE
SHEET 20X7 Est 20x6 20X5
$ $ $
Cash 417 448 246
2, 2, 2,
Receivables 210 337 653
1, 1, 1,
Inventories 075 137 718

Other 761 761 874

Total
Current
Assets 4,064 4,683 5,491

Property
, plant &
equipme 1 1
nt 3,972 2,982 12,963
Accumu
lated
deprecia
tion 8,089 7,323 7,044
Chapter 8 Homework 13

Net
property
&
equipme
nt 5,883 5,656 5,919
3, 3, 2,
Other assets 020 020 808
12, 13, 14,
Total Assets 967 362 212

Account
s
payable
&
accrued
liabilitie
s 3,098 3,276 3,403
1, 1, 2,
Short-term debt 378 378 058
Current
maturiti
es of i-t
debt 13 156 148

Income taxes 544 544 606

Total
Current
Liabiliti
es 5,033 5,354 6,215

1, 1, 1,
Long term debt 653 666 166
Postemp
loyment
liabilitie
s 2,728 2,728 2,722
Other
long-
term
liabilitie
s 720 720 681
10, 10, 10,
Total Liabilities 134 468 784

Common stock 978 978 978

Chapter 8 Homework 14

Capital surplus 849 849 871

Retained 6, 6, 7,
earnings 773 834 387
5, 5, 5,
Treasury stock 767 767 808
Shareholder 2, 2, 3,
equity 833 894 428
Total
liabilitie
s & net $ $
worth 12,967 13,362 $ 14,212

RATIO
S
AR turn 5.66 566 527
INV
turn 7.63 7.63 4.87
AP turn 2.65 2.65 2.46
FLEV 4.58 4.62 4.15
$ $ $
Div/sh 2.22 2.22 1.88

CAPEX 990 1047 783

CAPEX/Sales 7.91% 7.91% 5.60%

Stateme
nt of
Cash 20x7
Flow Estim.
Net Income $582
Depreciation 766
Acco
unts
receivab
le 127
Inventories 62
Accounts
payable -178
Net cash 1,359
flow
from
operatio
ns
Chapter 8 Homework 15

CAPEX -900
Net cash
flow
from
investin
g
activitie
s -990

Long term debt -156

Dividends -643
Net cash
flow
from
financin
g
activitie
s -799

Net change in
cash -431
Beginning cash 448
$
Ending cash 17