Chapter 15 – Financial Planning and Forecasting
CHAPTER 15 – FINANCIAL PLANNING AND FORECASTING
questions
LG1 1. Compare and contrast the use of pro forma financial statements in corporate financial
planning with their use in accounting.
LG2 1. Why might current liabilities be considered a spontaneous source of funding for a firm?
When a firm makes more products or provides more services, it will use more raw
LG3 2. What approach should be used to forecast sales if a firm believes that sales will be stable
LG3 3. What approach should be used to forecast sales if a firm believes that sales will increase
LG3 4. What is the optimal length of time over which to take an average of historic sales when
using the average approach?
It basically depends upon how stable you think the sales figures have been and will be
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Chapter 15 – Financial Planning and Forecasting
LG3 5. What is the theoretical minimum value for MAPE?
LG3 6. If a firm needs to keep a minimum cash balance on hand and faces both cash inflows and
outflows, which of the cash management models discussed in this chapter would be more
LG3 7. Can the procedure described in this chapter for adjusting for seasonality apply to periods
longer than a year? How?
LG4 8. Everything else held constant, which will be greater: AFN for a firm with excess fixed-
LG4 9. What does a negative value for AFN mean?
LG5 10. Which specific item of a pro forma income statement should be most expected to vary
LG5 11. Explain why we need to use the iterative calculation approach described in the text to get
a complete solution for AFN.
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Chapter 15 – Financial Planning and Forecasting
problems
basic
problems
LG3 15-1 Suppose a firm has had the historic sales figures shown as follows. What would be the
forecast for next year’s sales using the naïve approach?
Year: 2009 2010 2011 2012 2013
Sales $1,500,000 $1,750,000 $1,400,000 $2,000,000 $1,600,000
LG3 15-2 Suppose a firm has had the historic sales figures shown as follows. What would be the
forecast for next year’s sales using the naïve approach?
Year: 2009 2010 2011 2012 2013
Sales $2,500,000 $3,750,000 $2,400,000 $2,000,000 $2,600,000
LG3 15-3 Suppose a firm has had the historic sales figures shown as follows. What would be the
forecast for next year’s sales using the average approach?
Year: 2009 2010 2011 2012 2013
Sales $1,500,000 $1,750,000 $1,400,000 $2,000,000 $1,600,000
The average over the historic observation is:
$1, 500 ,000+$1, 750 ,000+$1, 400 ,000+$2, 000 ,000+$1,600 ,000
5=$1, 650 ,000
LG3 15-4 Suppose a firm has had the historic sales figures shown as follows. What would be the
forecast for next year’s sales using the average approach?
Year: 2009 2010 2011 2012 2013
Sales $2,500,000 $3,750,000 $2,400,000 $2,000,000 $2,600,000
The average over the historic observation is:
$2, 500 ,000+$3, 750 ,000+$2, 400 ,000+$2, 000 ,000+$2, 600 ,000
5=$2, 650 ,000
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LG4 15-5 Suppose that Gyp Sum Industries currently has the following balance sheet, and that sales
for the year just ended were $10 million. The firm also has a profit margin of 25 percent,
a retention ratio of 30 percent, and expects sales of $8 million next year. If all assets and
current liabilities are expected to shrink with sales, what amount of additional funds will
Gyp Sum need from external sources to fund the expected growth?
Assets Liabilities and Equity
Current
assets $2,000,000 Current
liabilities $1,500,000
Fixed
assets 4,000,000 Long-term
debt 1,500,000
Equity 3,000,000
Total
assets $6,000,000
Total
liabilities
and equity
$6,000,000
The necessary increase in assets will be:
Necessary increase in assets=A¿
S0
×ΔS
¿$6, 000 ,000
$10 ,000 ,000 ×
(
$8, 000 ,000−$10 ,000 ,000
)
¿−$1, 200 ,000
The spontaneous increase in liabilities will be:
( )
*
0
Spontaneous increase in liabilities =
$1,500,000 $8, 000,000 $10, 000,000
$10, 000, 000
$300,000
LS
S´ D
= ´ –
=–
The projected increase in retained earnings will be:
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LG4 15-6 Suppose that Wind Em Corp. currently has the following balance sheet, and that sales for
the year just ended were $7 million. The firm also has a profit margin of 27 percent, a
retention ratio of 20 percent, and expects sales of $8 million next year. If all assets and
current liabilities are expected to grow with sales, what amount of additional funds will
Wind Em need from external sources to fund the expected growth?
Assets Liabilities and Equity
Current
assets $2,000,000 Current
liabilities $2,500,000
Fixed
assets 5,000,000 Long-term
debt 1,500,000
Equity 3,000,000
Total
assets $7,000,000
Total
liabilities
and equity
$7,000,000
The necessary increase in assets will be:
Necessary increase in assets=A¿
S0
×ΔS
¿$7, 000 ,000
$7, 000 ,000 ×
(
$8, 000 ,000−$7, 000 ,000
)
¿ $ 1, 000 ,000
The spontaneous increase in liabilities will be:
The projected increase in retained earnings will be:
1
Projected increase in retained earnings
0.27 $8, 000,000 0.20
$432,000
M S RR= ´ ´
= ´ ´
=
Chapter 15 – Financial Planning and Forecasting
intermediate
problems
LG3 15-7 Suppose a firm has had the historic sales figures shown as follows. What would be the
forecast for next year’s sales using regression to estimate a trend?
Year: 2009 2010 2011 2012 2013
LG3 15-8 Suppose a firm has had the historic sales figures shown as follows. What would be the
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Chapter 15 – Financial Planning and Forecasting
LG4 15-9 Suppose that Psy Ops Industries currently has the following balance sheet, and that sales
for the year just ended were $5 million. The firm also has a profit margin of 25 percent, a
retention ratio of 30 percent, and expects sales of $8 million next year. If fixed assets
have enough capacity to cover the increase in sales and all other assets and current
liabilities are expected to increase with sales, what amount of additional funds will Psy
Ops need from external sources to fund the expected growth?
Assets Liabilities and Equity
Current
assets $2,000,000 Current
liabilities $1,500,000
Fixed
assets 4,000,000 Long-term
debt 1,500,000
Equity 3,000,000
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Chapter 15 – Financial Planning and Forecasting
Total
assets $6,000,000
Total
liabilities
and equity
$6,000,000
In this case, the necessary increase in assets will be based on only CA:
Necessary increase in assets=A¿
S0
×ΔS
¿$2, 000 ,000
$5, 000 ,000 ×
(
$8, 000 ,000−$5, 000 ,000
)
¿ $ 1, 200 ,000
The spontaneous increase in liabilities will be:
The projected increase in retained earnings will be:
1
Projected increase in retained earnings
0.25 $8, 000,000 0.30
$600,000
M S RR= ´ ´
= ´ ´
=
So AFN will be = $1,200,000 – $900,000 – $600,000 = -$300,000
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Education.