978-1285190907 Chapter 10 Part 7

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Chapter 10

Forecasting Financial Statements

10-61

in whole or in part.

Treasury Stock. If a firm repurchases some of its outstanding shares and does not

plan to retire them, the firm recognizes the cost of the repurchases in a treasury stock

account (a contra-equity account). The treasury stock account decreases (that is,

becomes more negative) when the firm repurchases some of its shares. The treasury

stock account increases (becomes less negative) when the firm’s treasury shares are

reissued on the open market, are used to meet stock option exercises, are exchanged

in merger or acquisition transactions, or are retired. Starbucks does not have a

treasury stock account in 2012, and this will likely remain the case in future years.

Accumulated Other Comprehensive Income. According to Starbucks’ Statement of

Common Shareholders’ Equity, at the end of 2012, Accumulated Other Comprehensive

Income includes primarily the cumulative effects of gains and losses from foreign

currency translation adjustments and, to a lesser extent, some unrealized fair value

gains and losses on investments securities deemed available for sale. The foreign

currency translation adjustments relate to Starbucks’ international operations in

countries whose currencies have changed in value relative to the U.S. dollar. We

assume Starbucks will continue to hold and possibly expand these international

operations. It is difficult to forecast, however, whether the U.S. dollar will increase or

decrease in value relative to the foreign currencies of Starbucks’ international

operations or the extent to which Starbucks will hedge or limit their exposure to foreign

currency movements. We project that Starbucks will experience gains and losses on

foreign currency translation adjustments (and fair value gains and losses) that are, on

average, zero (equally likely to be positive or negative in any given year), and so

Accumulated Other Comprehensive Income will remain at its current level. We also

include zero other comprehensive income items in the forecasts of Comprehensive

Income in Year +1 through Year +5.

Noncontrolling Interests. Starbucks has an immaterial amount of equity ($6 million)

invested by noncontrolling interest investors (minority shareholders in subsidiaries

that Starbucks controls and consolidates). For simplicity we assume that these

interests are retired in Year +1.

STEP 5: PROJECT INTEREST EXPENSE, INTEREST INCOME, INCOME TAX

EXPENSE, AND THE CHANGE IN RETAINED EARNINGS.

a. Interest Expense. Interest expense can now be projected based on the projected

balances in interest-bearing capital, including Short-Term Debt, Current Maturities of

Long-Term Debt, and Long-Term Debt, and the interest applicable to those types of

debt. The terms, interest rates, and maturity dates of outstanding debt appear in Note

10, “Debt,” in Starbucks 2012 Form 10-K. In that note, Starbucks discloses that the

$550 million senior long-term notes carry a 6.25% interest rate. We project interest

expense to be 6.25% of the average balance in long-term debt, until that debt matures

in Year +5.

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in whole or in part.

b. Interest Income. We can also project Starbucks’ interest income on financial assets,

such as cash, short-term and long-term investments in securities. In 2012, Starbucks

recognized $94 million in interest income on the average balance in cash, short-term

and long-term investments of $2,155 million [($1,148 + $1,189 + $903 + $848 +

$107 + $116)/2] million during 2012, which implies an average return of 4.4%. We

assume that Starbucks will continue to earn, on average, 4.4% and use that rate to

project Interest Income on the average balances in cash, short-term and long-term

investment securities in Year +1 through Year +5.

c. Income Taxes. Starbucks’ 2012 Form 10-K Note 13, “Income Taxes” shows the

reconciliation between the statutory tax rate and the average, or effective, tax rate.

Starbucks experienced an effective tax rate of 32.8% in 2012, 31.1% in 2011, and

34.0% in 2010. We assume the effective tax rate for Year +1 and beyond is likely to

average 33.0%.

d. Net Income. All of the elements of the income statement have been projected,

including first-iteration assumptions about interest expense and interest income.

Recall that Exhibit 10.I contains the complete income statement forecasts. The

following table shows the projected net income amounts and the implied profit

margins and growth rates in net income.

2012 Year +1 Year +2 Year +3 Year +4 Year +5

Net Income $1,385 $1,573 $1,793 $2,038 $2,303 $2,871

Net Profit Margin 10.4% 10.5% 10.7% 10.9% 11.1% 12.5%

Net Income Growth 11.0% 13.6% 14.0% 13.7% 13.0% 24.7%

e. Dividends and Retained Earnings. The Retained Earnings account typically

increases by the amount of net income (or decreases for net losses) and decreases for

dividends. In 2012, Starbucks’ dividend payout policy for common shareholders

amounted to paying 37% of net income in dividends. First-pass assumptions project

that Starbucks will maintain this 37% dividend payout policy in the future, as follows:

Retained Earnings:

Year +1 Year +2 Year +3 Year +4 Year +5

Beginning of Year ………… $ 5,046 $ 6,037 $ 7,167 $ 8,451 $ 9,902

Plus Net Income …………… 1,573 1,793 2,038 2,303 2,871

Less Dividends to

Common Shareholders … (582) (664) (754) (852) (1,062)

End of Year …………………. $ 6,037 $ 7,167 $ 8,451 $ 9,902 $11,711

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in whole or in part.

STEP 6: BALANCE THE BALANCE SHEET.

Even though first-iteration forecasts of all amounts on the income statement and balance

sheet have been completed, the balance sheet will not balance because the individual

asset and liability forecasts capture their individual activities, which do not vary together

perfectly. Currently, the projections of total assets minus the projections of liabilities and

common shareholders’ equity (other than retained earnings) and retained earnings

indicate the amounts by which the balance sheets do not balance.

Out-of-Balance Balance Sheet

Projections Year +1 Year +2 Year +3 Year +4 Year +5

Total Assets ……………………………. $ 9,050 $10,177 $ 11,364 $ 12,586 $ 14,342

Total Liabilities ………………………. $ 3,551 $ 3,768 $ 4,241 $ 4,500 $ 4,481

Shareholders’ Equity (other than

Retained Earnings) ……………… 67 73 78 84 93

Retained Earnings …………………… 6,037 7,167 8,451 9,902 11,711

Total Liabilities and Share-

holders’ Equity …………………… $ 9,655 $11,008 $ 12,771 $ 14,486 $ 16,285

Difference (Assets – Liabilities

– Equity) ……………………………. $ –605 $ –831 $ –1,407 $ –1,900 $ –1,942

Change in the Difference …………. $ –605 $ –226 $ –576 $ –494 $ –42

The difference between the projected totals of assets and the projected totals of liabilities

and shareholders’ equity each year represents the amounts by which a flexible financial

account must be adjusted to balance the balance sheet. The change in the difference

represents the new increment by which the flexible financial account must be adjusted

each year. Thus, in Year +1, the first-iteration forecasts project that liabilities and equities

will exceed assets by $605 million. A flexible financial account must be adjusted by $605

million to balance the balance sheet. In Year +2, the first-iteration projections indicate

that liabilities and equities will exceed assets by $831 million, so an additional

adjustment of $226 million is needed in Year +2, and so on.

Depending on Starbucks’ financial strategy, a number of Starbucks’ flexible financial

accounts could be used for this adjustment. Consider the following options:

—Increase cash or short-term securities if Starbucks will reinvest this capital in liquid

securities

—Increase long-term investment securities if Starbucks will reinvest this capital in

long-term investments

—Decrease long-term debt if Starbucks will use excess cash to retire its $550 million

in senior notes prior to maturity in Year +5

—Repurchase common equity shares or increase dividends if Starbucks will

distribute this capital to shareholders

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in whole or in part.

We assume that Starbucks will use excess cash to continue to repurchase common

equity shares in the future, as it has in recent years. Such repurchases of common equity

shares serve as implied dividends because they distribute excess capital to shareholders

through treasury stock repurchases rather than dividends per se. Therefore, the implied

dividends (stock repurchases) forecasts are adjusted each year by the amount necessary to

balance the balance sheet. In either case, the assumption that Starbucks will return excess

cash to shareholders through increased dividends and/or treasury stock repurchases will

have equivalent effects on total assets, total liabilities, total shareholders’ equity, and net

income. In essence, the adjustment to common share repurchases (or dividends) suggests

that if Starbucks meets all of the forecast assumptions, it will have sufficient excess cash

available to distribute a substantial flow of capital to common shareholders. After

projections are adjusted to include the implied dividends necessary to balance the balance

sheet, retained earnings is recalculated as follows (allow for rounding):

Retained Earnings:

Year +1 Year +2 Year +3 Year +4 Year +5

Beginning of Year ……………………… $ 5,046 $ 5,432 $ 6,336 $ 7,045 $ 8,002

Plus Net Income ………………………… 1,573 1,793 2,038 2,303 2,871

Less Dividends to

Common Shareholders …………….. (582) (664) (754) (852) (1,062)

Less Share Repurchases ……………… (605) (226) (576) (494) (42)

End of Year ………………………………. $ 5,432 $ 6,336 $ 7,045 $ 8,002 $ 9,769

The following table summarizes the final balance sheet forecast amounts (allow for

rounding). Recall that the balance sheet forecasts are shown in detail in Exhibit 10.J.

Summary of Balance Sheet Forecasts

Projections Year +1 Year +2 Year +3 Year +4 Year +5

Total Assets ……………………………. $ 9,050 $10,177 $ 11,364 $ 12,586 $ 14,342

Total Liabilities ………………………. $ 3,551 $ 3,768 $ 4,241 $ 4,500 $ 4,481

Shareholders’ Equity (other than

Retained Earnings) ……………… 67 73 78 84 93

Retained Earnings …………………… 5,432 6,336 7,045 8,002 9,769

Total Liabilities and Share-

holders’ Equity …………………… $ 9,050 $10,177 $ 11,364 $ 12,586 $ 14,342

Difference (Assets – Liabilities

– Equity) ……………………………. $ 0 $ 0 $ 0 $ 0 $ 0

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in whole or in part.

CLOSING THE LOOP: SOLVING FOR CO-DETERMINED VARIABLES.

Financial flexible accounts add a degree of circularity to financial statement forecasting.

For example, the balance sheet can be balanced by plugging the excess funds to interest-

earning accounts (for example, investment securities). Firms with significant amounts of

debt, unlike Starbucks, are likely to use the excess funds to pay down interest-bearing

debt. In either case, the projected amounts for interest income or interest expense must be

adjusted accordingly on the income statement. This creates an additional set of co-

determined variables in the financial statements forecasts. For example, assume that

Short-Term Debt is used as the flexible financial account and that it is adjusted

downward by the amount of excess cash to balance assets with liabilities and

shareholders’ equity. To calculate the necessary plug to Short-Term Debt, you need to

know all of the other asset, liability, and shareholders’ equity amounts, including retained

earnings. To forecast retained earnings, you must know net income, which depends on

interest expense on Short-Term Debt. To calculate Retained Earnings, you also need to

know dividends, which depend on Net Income. Thus, you need to solve for at least five

unknown variables simultaneously.

This problem might seem intractable, but it is not because of the computational

capabilities of computer spreadsheet programs such as Excel®. To solve for multiple

variables simultaneously in older versions of Excel®, click the Tools menu, click the

Calculations menu, and then click the Iterations box. Excel® will solve and re-solve

circular references up to 1,000 times until all of the calculations fall within the specified

tolerance for precision. In newer versions of Excel®, click the Office Button, click Excel

Options menu at the bottom of the drop-down box, and then click the Formulas tab. At

the top of that menu, you will see Calculation options; check the box to “Enable iterative

calculation” and allow for up to 1,000 iterations. Then you can program each cell to

calculate the variables needed, even if they are simultaneously determined with other

variables. FSAP’s default settings are programmed for iterative simultaneous

computations, but some versions of Excel® automatically reset the default settings. The

FSAP user should follow these steps to double-check that the FSAP spreadsheet will

compute co-determined variables simultaneously.

STEP 7: PROJECT THE STATEMENT OF CASH FLOWS.

The final step involves deriving projected statements of cash flows directly from the

projected income statements (Exhibit 10.I) and balance sheets (Exhibit 10.J). You capture

all of the changes in the projected balance sheets each year and express these changes in

terms of their implied effects on cash. Increases in assets imply uses of cash; decreases in

assets imply sources of cash. Increases in liabilities and shareholders’ equity imply

sources of cash; decreases in liabilities and shareholders’ equity imply uses of cash.

Exhibit 10.L presents the projected statement of cash flows for Starbucks for Years +1

through +5. The derivation of each line item is as follows:

(1) Net Income: Enter the amounts in the forecasted income statements (Exhibit

10.I).

(2) Depreciation Expense: Add back the projected amount of depreciation expense

included in net income that is used to compute the net change in accumulated

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in whole or in part.

depreciation on property, plant, and equipment. The depreciation expense

forecast should reconcile with the change in accumulated depreciation on the

projected balance sheet (minus the decrease in accumulated depreciation from

assets that were sold or retired, if any). Add back amortization expense on

amortizable intangible assets. The amount of amortization expense to add back

to net income should reconcile with the change in amortizable intangible assets

balance, adjusted for any new investments in those assets (which should be

included as cash outflows in the investing section of this statement).3 The

assumption for Starbucks was that amortization expense would be immaterial

because amortizable intangible assets are minor amounts.

(3)–(9): Working Capital Accounts: Adjust net income for changes in various

operating current asset and current liability accounts other than cash (such as

accounts receivable, inventory, accounts payable, and accrued expenses)

appearing on the projected balance sheet.

(10), (11): Deferred Taxes and Long-Term Accrued Expenses: Adjust net income

for changes in deferred taxes, noncurrent liabilities for accrued expenses, and

changes in other noncurrent liabilities. These items include changes in long-

term accruals for expenses that are part of operations, including deferred taxes,

pension and retiree benefit obligations, warranties, and other noncurrent

liabilities that appear on the projected balance sheets.

Net Cash Flows from Operations: The sum of the preceding cash inflows and

outflows is net cash flows from operating activities.

(12) Property, Plant, and Equipment: The amount on this line captures cash

outflows for the projected capital expenditures included in the change in

property, plant, and equipment (at cost) on the projected balance sheet in

Exhibit 10.J minus any cash proceeds from sales of property, plant, and

equipment. As a check, the analyst should make sure that the statement of cash

flows captures all of the net cash flow implications of property, plant, and

equipment. To verify this, the amount of depreciation expense added back to net

income minus cash outflows for capital expenditures plus cash inflows for any

asset sales or retirements should equal the change in net property, plant, and

equipment on the projected balance sheet.

(13), (14): Marketable Securities and Investment Securities (Net): The statement

of cash flows classifies net purchases and sales of marketable securities (current

asset) and investment securities (noncurrent asset) as investing transactions. The

changes in these accounts on the projected balance sheets determine the

amounts for these items on the statement of cash flows.

3 Note that we should not need to add back any amortization expense for nonamortizable intangible assets

such as goodwill and brands with indefinite lives because under U.S. GAAP and IFRS goodwill and other

intangibles with indefinite lives are not amortized, so we included no amortization expense for these

assets in our projected income statements.

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in whole or in part.

(15) Amortizable Intangible Assets: Enter the net change in amortizable intangible

assets on this line. The change in this asset account on the projected balance

sheets is the net of cash outflows to acquire amortizable intangible assets plus

any cash inflows from sales or retirements of such assets. As discussed in Item

(2), amortization expense is usually added back to income in the operating

section of the statement of cash flows. Thus, the adjustment for cash outflows or

inflows for amortizable intangible assets in the investing section of the

statement should not include the effects of amortization expense. Given that

amortizable intangibles are commonly shown on balance sheets net of

accumulated amortization, the change in the net amortizable intangible assets

account balance will reflect both effects: cash flows from investing activities

and amortization expense. To isolate the cash flows from investing, the analyst

should add amortization expense back to the net change in this account balance,

but this amount is immaterial for Starbucks.

(16) Goodwill and Nonamortizable Intangible Assets: Enter the changes in

goodwill and nonamortizable intangible assets on this line. Given that these

assets are not amortized, the net change in the nonamortizable intangible assets

balance on the projected balance sheets should reflect cash outflows to acquire

new nonamortizable intangible assets minus cash inflows from selling or

retiring such assets. If the account balance for nonamortizable intangible assets

has declined because of an impairment charge, the analyst should add this

noncash charge back to net income in the operating section of the statement of

cash flows and adjust accordingly the cash flow implications from

nonamortizable intangibles in the investing section (similar to adding back

amortization expense).

(17), (18) Other Noncurrent Assets: Enter the changes in equity method affiliates

and other noncurrent assets on these lines. The changes in the other noncurrent

asset accounts on the projected balance sheets measure the cash outflows to

acquire such assets net of any cash inflows from sales or retirements of such

assets.

Net Cash Flows from Investing Activities: The sum of lines (12) through (18)

measures the net cash flows from investing activities.

(19), (20) Short-Term and Long-Term Debt: Changes in interest-bearing debt

(short-term notes payable, current maturities of long-term debt, and long-term

debt) on the projected balance sheets are financing activities.

(21) Changes in Common Stock and Additional Paid-in Capital: These amounts

represent the financing cash flows from changes in the common stock and paid-

in capital accounts on the projected balance sheets.

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in whole or in part.

(22) Changes in Accumulated Other Comprehensive Income: These amounts

represent the changes in the accumulated other comprehensive income account

that is a component of shareholders’ equity on the projected balance sheets.

(23) Implied Dividends: Enter the projected amounts for common and preferred

dividends each year (discussed earlier in the section on Retained Earnings in the

projected balance sheets). For Starbucks, these amounts include the plug to

implied dividends for repurchases of common shares.

Net Cash Flows from Financing Activities: The sum of lines (19) through

(23) measures the net cash flows from financing activities.

(24) Net Change in Cash: The aggregate of the amounts of cash flows from

operations, investing activities, and financing activities. This total should equal

the change in cash on the projected balance sheets.

You should inform students that the statement of cash flows will not reconcile with

the projected income statement and balance sheets if the balance sheets do not balance

and if the income statement does not articulate with the balance sheets. (That is, net

income should be included in the change in retained earnings.)

Students may become frustrated and waste time if they attempt to reconcile all of the

items on historical statements of cash flows with changes in historical balance sheets.

They become further frustrated when they attempt to use past statements of cash flows to

project future statements of cash flows. Unlike historical balance sheets and income

statements, historical statements of cash flows commonly do not provide good bases for

projecting the future because many of the line items on the statement are difficult to

reconcile with historical changes in balance sheets. This is because the statement of cash

flows can aggregate numerous cash flows on each line item and students may not be able

to determine what amounts have been aggregated. For example, the statement may report

separately the aggregate cost of a business acquisition on one line, but the business

acquisition can cause changes in many asset and liability accounts, recognizing the

acquisition of various assets and liabilities. In addition, students may not be able to verify

the details of the reported cash flows. For example, the statement might disclose

separately the amount of marketable securities purchased and sold. There is no way for

students to verify those amounts because they can observe only the net change in the

marketable securities balance during the year. Thus, students should simply compute the

implied statement of cash flows from the projected income statements and balance sheets,

which students can observe and verify. We strongly encourage our students to not attempt

to reconcile past statements of cash flows, and to simply develop their own implied

statements of cash flow forecasts using the procedures described in the chapter.

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in whole or in part.

Exhibit 10.L

Starbucks

Implied Forecasts of Statements of Cash Flows for Year +1 to +6

(amounts in Millions; allow for rounding)

(Integrative Case 10.1)

Actuals Forecasts

IMPLIED STATEMENT OF CASH FLOWS 2011 2012 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

Net Income $ 1,248 $ 1,385 $ 1,573 $ 1,793 $ 2,038 $ 2,303 $ 2,871 $ 2,958

Add back depreciation expense (net) 336 436 720 839 972 1,120 875 263

Add back amortization expense (net) 000 00000

(Increase) Decrease in receivables—net –84 –99 –110 –104 –100 –88 –96 –30

(Increase) Decrease in inventories –423 –276 20 –137 –147 –153 –166 –55

(Increase) Decrease in prepaid expenses –5 –35 –11 –11 –13 –13 –14 –8

Increase (Decrease) in accounts payable—trade 257 –142 193 –57 178 –53 190 25

Increase (Decrease) in current accrued liabilities 5 193 142 153 166 174 191 59

Increase (Decrease) in deferred revenues 35 61 64 69 74 78 86 26

Increase (Decrease) in insurance reserves –1225 55566

Net change in deferred tax assets and liabilities 74 –8 –36 –38 –43 –46 –99 –15

Increase (Decrease) in long-term accrued liabilities –27 –3 43 47 50 53 58 18

Net Cash Flows from Operations $ 1,416 $ 1,534 $ 2,603 $ 2,559 $ 3,181 $ 3,381 $ 3,901 $ 3,248

(Increase) Decrease in property, plant, & equip. at cost –274 –740 –1,200 –1,341 –1,496 –1,660 –1,839 –433

(Increase) Decrease in marketable securities –617 54 –25 –26 –27 –28 –29 –30

(Increase) Decrease in investments in noncontrolled affiliates –31 –88 –46 –51 –56 –61 –67 –22

(Increase) Decrease in amortizable intangible assets (net) 8 24 –48 –52 –56 –59 –65 –20

(Increase) Decrease in goodwill and nonamort. intangibles –59 –78 –50 –54 –58 –61 –67 –21

(Increase) Decrease in long-term investments 85 –9 –3 –4 –4 –4 –4 –4

Net Cash Flows from Investing Activities $ (889) $ (836) $ (1,373) $ (1,527) $ (1,697) $ (1,873) $ (2,071) $ (530)

Increase (Decrease) in short-term debt 0 0 0 0 0 550 –550 0

Increase (Decrease) in long-term debt 0 0 0 0 0 –550 0 0

Increase (Decrease) in common stock + paid in capital –105 –1 4 56692

Increase (Decrease) in accum. OCI –11–240 00000

Implied Dividends and Share Repurchases –420 –635 –1,187 –889 –1,330 –1,346 –1,104 –2,664

Increase (Decrease) in noncontrolling interests –82–6 00000

Net Cash Flows from Financing Activities $ (543) $ (657) $ (1,189) $ (884) $ (1,324) $ (1,340) $ (1,645) $ (2,662)

Net Change in Cash $ (16) $ 41 $ 41 $ 148 $ 160 $ 168 $ 184 $ 57

Check Figure: Net change in cash—Change in cash balance 000 00000

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in whole or in part.

ANALYZING PROJECTED FINANCIAL STATEMENTS.

As a reality check on the reasonableness of the forecast assumptions and their internal

consistency with one another, the projected financial statements can be analyzed using

financial statement analysis ratios and other analytical tools. For example, the analyst can

compare projected growth rates in sales with projected growth rates in net income to

assess whether the income statement assumptions imply reasonable profit margins in

light of sales growth projections.

The analyst also can check the implications of forecast assumptions on the projected

ROA and the projected ROCE (and its components: profit margin, asset turnover, and

capital structure leverage). If the results show increases in ROCE, for example, the

analyst can assess whether the profitability, efficiency, and leverage assumptions driving

the increase are reasonable.

In addition, the analyst can assess whether the forecast assumptions imply changes in

liquidity ratios, solvency ratios, and interest coverage ratios over time. Analyzing such

ratios can tell the analyst whether the projections are likely to alter the credit riskiness of

the firm.

Financial statement ratios can confirm whether the forecast assumptions are

reasonable and whether the computations are correct. Unfortunately, such ratios cannot

confirm whether the assumptions are correct. These ratios do not reveal whether our

forecasts of Starbucks’ sales growth and profitability will turn out to be correct. For this

confirmation, only time will tell. Exhibit 10.M presents financial statement ratios analysis

based on the financial statement forecasts developed in this case discussion.

SENSITIVITY ANALYSIS AND STRATEGIC PLANNING.

Financial statement forecasts can serve as the base case from which students assess the

impact of various critical forecast assumptions for the firm and from which students can

test strategic planning ideas for the firm. For example, with these financial statement

forecasts, students can assess the sensitivity of projected net income and cash flows to

key assumptions about the Starbucks’ sales growth rates, new store opening assumptions,

gross profit margins, control over store operating expenses, and other assumptions. For

example, using the initial financial statement forecasts as the base case, you can easily

show students how to assess the impact on Starbucks’ profitability from a one-point

increase or decrease in sales growth, from a one-point increase or decrease in the gross

profit margin, or from the opening of 100 more company-operated stores.

You also can use the financial statement forecasts to assess the sensitivity of the

firm’s liquidity and leverage to changes in key balance sheet assumptions. For example,

you can assess the impact on Starbucks’ liquidity and solvency ratios by varying the

assumption that Starbucks will balance the balance sheet by paying dividends. Instead,

you can show students the effect of assuming that Starbucks will decrease short-term debt

to balance the balance sheet. You can then show students how such a plug to short-term

debt affects Starbucks leverage ratios and ROCE over time. Although Starbucks is not

highly leveraged, you also can make the point that lenders and credit analysts use the

financial statement forecasts to assess the conditions under which the firm’s debt

covenants may become binding. Starbucks has long-term debt and revolving line of credit

agreements that require the firm to maintain certain minimum liquidity and interest

coverage ratios. The financial statement forecasts provide the analyst with a structured