Review Ch. 4 and Ch. 12
Chapter 4 Outline
1.
2.
3.
4.
5.
What is financial planning
Financial planning models
The percentage of sales approach
External financing and growth
Caveats in financial planning
2
Percentage of sales approach:
COMPUTERFIELD CORPORATION
Financial Statements
Income statement
Balance sheet
Sales
$8,000
CA
$5000
Debt
$8250
Costs
5,800
FA
$7000
Equity
$3750
Total
$12000
Total
$12000
Net Income $2,200
3
EFN and Capacity Usage
• Suppose COMPUTERFIELD is operating at 80%
capacity:
1. What would be sales at full capacity? (1p)
2. What is the capital intensity ratio at full
capacity? (1p)
3. What is EFN at full capacity and Dividend
payout ratio is 15%? (1p)
What is EFN to increase sales to 12000 and
Dividend payout ratio is 35%?
4
Q 1:8,000/.8=10,000; Full capacity as increase
10,000/8,000 = 1.25 (25%)
•
•
•
•
Income statement
Sales $8,000
Costs $5,800
N I $2,200
• Ret earnings 2,200*.85=1,870
• New Ret earnings 1,870*1.25=2,337.5
• There is no indication that any changes took
place in % cost for the proforma income
statement, we can get the same result by
increasing RE or by creating proforma IS
13-5
New assets needed
•
•
•
•
CA
5000*1.25=6,250 C A
TA =6,250+7000 FA
Total
13,250
Balance sheet
$5000
Debt
$8250
$7000
Equity
$3750
$12000
Total
$12000
• capital intensity ratio at full capacity
• =13,250/10,000 =1.325
• EFN =0 change in TA = 1250 which is less than
the retained earnings, we can fully finance
internally full capacity operation.
13-6
What is EFN to increase sales to 12,000 (50%) and
Dividend payout ratio is 35%?
•
•
•
•
Income statement
Sales $8,000
Costs $5,800
N I $2,200
• Ret earnings 2,200*.65=1,430
• New Ret earnings 1,430*1.5=2,145
• There is no indication that any changes took
place in % cost for the proforma income
statement, we can get the same result by
increasing RE or by creating proforma IS
13-7
Recent Sales 8,000; Proj. Sales 12,000
Increase 50%
• CA 5,000*1. 5=7,500
• FA=7,000+1,400
• TA =15,900
Balance sheet
CA
$5000
Debt
$8250
FA
$7000
Equity
$3750
Total
$12000
Total $12000
• FA=7000/10000 per unit of sales=.7
• Inv . Need for 2000 more units of sales
=.7*2000=1,400
• EFN=1,755 change in TA = 3,900 from RE=2,145
13-8
EFN=1,755
•
•
•
•
D/E ratio =3/2
EFN=1,755
How much debt should be issued?
How much equity?
• If they issue only debt (all 1,755 in bonds)
what will be the D/E ratio on the proforma BS?
• D=8,250+1,755=10,005
• E=3,750+2,145=5,895 D/E=1.69
13-9
Please, Review also
• Internal Growth Rate
• Sustainable Growth Rate
Chapter 12 Overview
• Return of an investment: arithmetic and geometric
• The variability of returns
• Efficiency of capital markets
11
Arithmetic vs. Geometric
Averages (1)
• Geometric return = the average compound
return earned per year over multiyear period
Geometric average return =
 T (1  R1 ) * (1  R2 ) *...* (1  RT ) 1
• Arithmetic average return = the return earned
in an average (typical) year over a multiyear
period
12
The Variability of Returns
• Variance = the average squared deviation
between the actual return and the average
return
(R  R )

Var ( R) 
2
i
T 1
• Standard deviation = the positive square root
of the variance
  Var
13
The Normal Distribution (2)
14
Z-score
• For any normal random variable:
X 
Z

• Z – z-score
• X – normal random variable
•
- mean

15