978-1337614689 Chapter 10 Part 2

Exhibit 10.E

Walmart Stores—Revised Balance Sheet Forecasts (Integrative Case 10.1) (amounts in millions)

Actuals Forecasts

2013 2014 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

BALANCE SHEET

Current Assets 61,185 63,278 60,239 61,383 62,437 63,512 64,608 65,726 67,698

common size 29.9% 31.1% 30.2% 30.5% 30.8% 31.3% 31.8% 32.4% 32.4%

Actuals Forecasts

2013 2014 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

LIABILITIES:

Accounts payable 37,415 38,410 38,487 38,503 39,261 40,047 40,847 41,664 42,914

rate of change (100.0%) Assume no additional discontinued operations.

Current Liabilities 69,345 65,253 64,619 65,218 66,572 67,967 69,392 70,848 72,973

Forecasting Financial Statements

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rate of change (0.6%) (1.9%) 0.9% 0.6% 0.3% 0.1% (0.1%) 3.0%

Check figures: Balance Sheet A=L+OE? 0 0 0 0 0 0 0 0

Initial adjustment needed to balance the balance sheet:

(4,955) (6,501) (7,224) (7,940) (8,660) (3,330)

Dividends and share repurchases forecasts:

Common dividends: (6,172) (6,291) (6,412) (6,535) (6,660) (6,860)

(42.0%) (42.0%) (42.0%) (42.0%) (42.0%)

Assume dividend payout of net income.

Share repurchases (4,000) (4,000) (4,000) (4,000) (4,000) (4,120)

(4,000) (4,000) (4,000) (4,000) (4,000)

Exhibit 10.F

Walmart Stores—Revised Statement of Cash Flows Forecasts (Integrative Case 10.1) (amounts in millions)

Actuals Forecasts

Net Cash Flows from Operations 24,176 21,796 24,406 26,032 26,837 27,636 28,440 20,961

<Increase> Decrease in property, plant, & equip. at cost (3,956) (5,420) (10,000) (10,000) (10,000) (10,000) (10,000) (7,142)

Increase <Decrease> in common stock + paid in capital 100 (663) 64 66 68 70 72 74

Increase <Decrease> in accum. OCI (4,172) (4,429) 0 0 0 0 0 0

Increase <Decrease> in treasury stock and other equity adjs. 0 0 0 0 0 0 0 0

Dividends (7,152) (10,450) (15,128) (16,792) (17,636) (18,475) (19,321) (14,311)

Increase <Decrease> in noncontrolling interests (1,277) (1,864) (386) (386) (386) (386) (386) (306)

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d. Exhibit 10.G presents profitability and risk ratios for Walmart based on the

financial statement forecasts originally developed (with the plug to cash) and

the revised forecasts (with the plug to dividends). The projections indicate a

declining ROCE as well as a declining ROA for Walmart with the plug to cash,

the result of a declining total assets turnover. The ROCE in Year +5 is 22.2%

with the revised forecasts, whereas it is only 15.7% under the original forecasts.

Similarly, the ROA in Year +5 is 9.0% under the revised forecasts and only

7.9% under the original forecasts. Clearly, Walmart shareholders will prefer the

higher rates of return under the increased dividend policy.

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Chapter 10

Forecasting Financial Statements

Exhibit 10.G

Walmart Stores—Projected Financial Statement Ratios (Integrative Case 10.1)

Originally Developed Forecasts (with Plug to Cash)

Actuals Forecasts

2013 2014 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

FORECAST VALIDITY CHECK DATA:

= Return on Assets 8.9% 9.2% 8.3% 8.3% 8.2% 8.1% 8.0% 7.9% 7.9%

RETURN ON ASSETS (excluding the effects of nonrecurring items):

Profit Margin for ROA 3.8% 3.8% 3.5% 3.4% 3.4% 3.4% 3.5% 3.5% 3.5%

× Asset Turnover 2.3 2.4 2.4 2.4 2.4 2.3 2.3 2.3 2.3

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Revised Forecasts (with Plug to Dividends):

Actuals Forecasts

2013 2014 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

Actuals Forecasts

2013 2014 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Year +6

ASSET TURNOVER:

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Case 10.2: Massachusetts Stove Company: Analyzing Strategic Options

I. Case Objectives

business that is approaching maturity.

II. Teaching Strategy

We begin discussion of this case by asking students to identify clues from the

financial statements for Year 3 to Year 7 that Massachusetts Stove Company is in a

years indicate increased margin pressure but cutbacks in asset growth,

particularly capital expenditures.

ii. There is a buildup of cash on the balance sheet even after substantially

reducing debt.

iii. A counter clue is the substantial increase (15.1%) in sales between Year 6

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Forecasting Financial Statements

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end of the period. This preliminary balance in cash was then used to compute

the average balance in cash for the year on which interest income was

spreadsheets, as was done here, so that the assumptions appear at the bottom

and the formulas access these assumptions when students make computations.

c. Projected Financial Statements and Ratios

Exhibits 10.H–10.K of this teaching note present the projected financial

statements and ratios for the best-case scenario. Exhibits 10.L–10.O present

continually as it repays its bank borrowing without adding additional borrowing

to finance capital expenditures or product development. The short-term liquidity

and long-term solvency ratios are strong throughout the five years.

Most Likely Scenario—The most likely scenario results in a declining profit

margin and asset turnover during the phase-in period as a result of incurring

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Worst-Case Scenario—The profit margin declines even further under the

or negative in Year 9 to Year 12.

d. Assessment of Strategic Options

In evaluating the move into gas stoves, it is helpful to examine the financial

Rate of Return on Assets

Sales Growth Year 7 Year 8 Year 9 Year 10 Year 11 Year 12

+0.04 13.14% 13.56% 13.23% 12.92% 12.60% 12.29%

+0.02 13.14% 13.19% 12.61% 12.11% 11.65% 11.23%

–0.02 13.14% 12.45% 11.37% 10.47% 9.71% 9.06%

–0.10 13.14% 10.94% 8.85% 7.16% 5.74% 4.52%

0.00 32.56% 26.12% 21.34% 18.17% 15.90% 14.28%

–0.04 32.56% 24.36% 18.79% 15.19% 12.66% 10.80%

–0.10 32.56% 21.65% 14.88% 10.56% 7.53% 5.25%

The most likely scenario from moving into the gas stove market provides rates

of return on assets in Year 12 similar to those above when sales of wood stoves

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The most compelling arguments for adding gas stoves to the product line are

as follows: