CASE TARGET
Prospective Analysis
The CFO of Target has asked you to make a five-year budget for the company. The company is
concerned about its growth prospects and they think that it will be necessary to keep its capital
expenditures at the high 2018 level in order to avoid a decline in sales. That, however, might drain
the company’s cash reserves. The company does not think it is in a position to borrow more money
or to ask for money from their shareholders.
You are asked to prepare the following budgets, using the template Target.xls and the input below:

Income Statement budget

Balance Sheet budget

Cash Flow Statement budget
Input
1. Sales growth
The company expects sales growth to fall by 1%-point per annum (=sales growth reversion
rate) during the forecast horizon.
2. Gross profit margin
The gross profit margin is expected to be
2019 - 2020: 33%
2021 - 2023: 32%
3. Selling, general and administrative expense (SGA)
2019 – 2023: 22,5% of sales
4. Depreciation
2019 – 2023: 6% of prior-year PP&E
5. Interest income
2019 – 2023: 4% of prior-year cash balance
6. Interest expense
2019 – 2023: 5,2% og prior-year interest-bearing debt
7. Income tax expense
2019 – 2023: 37,5% of pretax income
8. Income from discontinued operations
2019 – 2023: 0
9. Account receivable (AR)
Account receivable turnover rate (sales/AR end balance)
2019 – 2023: 9,0
10. Inventory
Inventory turnover rate (COGS/Inventory end balance)
2019 – 2023: 6,0
11. Deferred tax
The deferred tax liability is expected to be 12,0% of net PP&E throughout the forecast
horizon
12. Other current assets
Will be 2000 in the period 2019-2023
13. Account payable (AP)
Account payable turnover rate (COGS/AP end balance)
2019 – 2023: 5,5
14. Accrued expenses
Accrued expense turnover rate (SGA/Accrued expense end balance) will be 5.0 in the period
2019-2023
15. Tax payable
Tax payable/Tax expense
2019 – 2023: 30%
16. Dividend
Dividend ratio (dividend/net income)
2019 – 2023: 40%
17. Capital expenditures (CAPEX)
2019 – 2023: 3 000 000 000
18. Installments interest-bearing debt
2019 – 2023: 500 000 000
Additional questions:

Will Target manage to finance its growth and at the same time keep its dividend ratio at 40%?

Will Target’s profitability increase or decline and why?

What will keep Target’s profitability at 2018 level throughout the forecast horizon?
Target
Income Statement (in millions)
Sales
Cost of goods sold
Gross profit
SGA
Depreciation
Operating income
Interest income
Interest expense
Income before tax
Tax expense
Net income from continuing operations
Income from discontinued operations
Net income
Historical figures
2016
2017
2018
37,410
42,025
46,839
-25,498 -28,389 -31,445
11,912
13,636
15,394
-8,134
-9,379 -10,534
-967
-1,098
-1,259
2,811
3,159
3,601
25
30
28
-584
-556
-570
2,252
2,633
3,059
-851
-984
-1,146
1,401
1,649
1,913
247
190
1,313
1,648
1,839
3,226
Target
Historical figures
Balance Sheet (in millions)
Gross PP&E
Accumulated depreciation
Net PP&E
Other non-current assets
Total non-current assets
2016
18 936
-3 629
15 307
1 361
16 668
2017
19 880
-4 727
15 153
3 311
18 464
2018
22 846
-5 986
16 860
1 511
18 371
Inventories
Trade receivables
Other current assets
Cash
Total current assets
4 760
5 565
852
758
11 935
4 531
4 621
3 092
708
12 952
5 384
5 069
1 224
2 245
13 922
TOTAL ASSETS
28 603
31 416
32 293
Share capital
Share premium
Retained earnings
Shareholders equity
76
1 256
8 711
10 043
76
1 256
9 800
11 132
76
1 256
11 697
13 029
Deferred tax
Long-term debt
Total long-term liabilities
1 451
9 586
11 037
1 815
10 155
11 970
2 010
9 034
11 044
975
4 684
1 545
319
7 523
863
4 956
2 188
307
8 314
504
5 779
1 633
304
8 220
28 603
31 416
32 293
Current portion of long-term debt
Accounts payable
Accrued expenses
Taxes payable
Toal current liabilities
TOTAL EQUITY AND LIABILITIES
Historical figures
Selected Ratios
Account receivable turnover rate
Inventory turnover rate
Deferred tax/PP&E
Account payable turnover rate
Accrued expenses turnover rate
Tax payable/Tax expense
Dividends (in millions)
Dividend ratio (Dividend/Net income)
Capital expenditures (CAPEX) - (in millions)
CAPEX/Sales
Installments interest-bearing debt
NOWC (in millions)
Change in NOWC (in millions)
2016
6,7
5,4
9,5 %
5,4
5,3
37,5 %
975
4 629
2017
9,1
6,3
12,0 %
5,7
4,3
31,2 %
750
40,8 %
944
2,25 %
863
4 793
164
2018
9,2
5,8
11,9 %
5,4
6,5
26,5 %
1 329
41,2 %
2 966
6,33 %
504
3 961
-832