Allied Food Products: Actual 2005 and projected 2006 Income Statements ($ Millions)
1
Actual Forecast 2006 Forecast
2005 Basis 1st Pass Feedback 4th Pass Modified
(1) (2) (3) (4) (5) (6)
1. Sales $3,000 x 1.10 a $3,300 $3,300 $3,300
2. Costs except deprec 2,616.2 x 1.10 2,877.8 2,877.8 2,854.5
3. Depreciation 100 x 1.10 110 110 105
4. Total operating costs 2,716.2 $2,987.8 2,987.8 2,959.5
5. EBIT $ 283.8 $ 312.2 $ 312.2 $ 340.5
6. Less interest 88 88b +6.3 94.3 86.2
7. Earnings before taxes $ 195.8 $ 224.2 $ 217.9 $ 254.3
8. Taxes (40%) 78.3 89.7 -2.5 87.2 101.7
9.NI available to $ 117.5 $ 134.5 $ 130.7 $ 152.6
common stockholders
10.Dividends to com. stk. $ 57.5 $ 63.3 c $ 63.3 $ 63.3
11.Addition to retained 60 $ 71.3 -3.8 $ 67.5 $ 89.3
earnings
Allied Food Products: Actual 2005 and projected 2006 Income Statements ($ Millions)
2
a x 1.10 indicates “times 1 + g”; used for items which grow
proportionally with sales. Here g = 0.10.
b 2005 amount carried over for first-pass forecast.
Indicated in Column 2 by an arrow.
c Projected figure. See text for explanation.
Allied Food Products: Actual 2005 and projected 2006 Balance Sheets
2006 Forecast 3
Actual‘05 1+ Sales g 1st Pass AFN a 4th Pass
(1) (2) (3) (4) (5)
Cash $ 10 x 1.10 b $ 11 $ 11
Accounts receivable 375 x 1.10 412.5 412.5
Inventories 615 x 1.10 676.5 676.5
Total current assets $1,000 $1,100 $1,100
Net plant & equipment 1,000 x 1.10 1,100 1,100
Total assets $2,000 $2,200 $2,200
Accounts payable $ 60 x 1.10 $ 66 $ 66
Notes payable 110 110 c +7.9 117.9
Accruals 140 x 1.10 154 154
Total current liabilities $ 310 $ 330 $ 337.9
Long-term bonds 750 750 +51.7 801.7
Total debt $1,060 $1,080 $1,139.6
Common stock 130 130 c +52.9 182.9
Retained earnings 810 +71.3 d 881.3 877.5
Total common equity $ 940 $1,011.3 $1,060.4
Total liabilities & equity $2,000 $2,091.3 +108.7 $2,200
Add’l funds needed (AFN) $ 108.7
Cumulative AFN $ 108.7
Allied Food Products: Acutal 2005 and projected 2006 Balance Sheets ($ Millions)
4
a AFN stands for “Additional Funds Needed.” This figure
is determined at the bottom of Column 3 and Column 4
shows how the required $108.7 of AFN will be raised.
b x 1.10 indicates “times 1 + g”; used for items which grow
proportionally with sales. Here g = 0.10
c Indicates a 2005 amount carried over as the first-pass
forecast. Arrows also indicate items whose values are
carried over from one pass to another.
d From Table 17-1, Line 13
The AFN Formula 5
Additional Required Spontaneous Increase in
funds = increase - increase in - retained
needed in assets liabilities earnings
AFN = (A*/S) S - (L*/S) S - MS1(1 - d)
Descriptions of notations on following slides.
The AFN Formula 6
AFN = additional funds needed.
A*/S = assets that must increase if sales are to to increase
expressed as a percentage of sales, or the required
dollar increase in assets per $1 increase in sales. A*/S =
$2,000/$3,000 = 0.6667 for Allied. Thus, for every $1
increase in sales, assets must increase by about 67 cents.
Note that A designates total assets and A* designates
those assets that must increase if sales are to increase.
When the firm is operating at full capacity, as is the
case here, A* = A. Often, though, A* and A are not
equal, and the equation must be modified or else the
projected financial statement method must be used.
The AFN Formula 7
L*/S = liabilities that increase spontaneously with sales as
a percentage of sales, or spontaneously generated
financing per $1 increase in sales. L*/S = ($60 + $140) /
$3,000 = 0.0667 for Allied. Thus, every $1 increase in
sales generates about 7 cents of spontaneous financing.
Again, L* represents liabilities that increase
spontaneously, and L* is normally much less than total
liabilities (L).
S1 = total sales projected for next year. Note that S0
designates last year’s sales. S1 = $3,300 million for
Allied.
The AFN Formula 8
S = change in sales = S1 - S0 = $3,300 million - $3,000
million = $300 million for Allied.
M = profit margin, or rate of profit per $1 of sales. M =
$114/$3,000 = 0.0380 for Allied.
d = percentage of earnings paid out in common
dividends, or the dividend payout ratio; d= $58/$114 =
0.5088 for Allied.
Financial Forecasting
9
Latest Financial
Financial Sales Cost Accounting Market
Statements Forecast Forecasts Data
Preliminary Projections:
1. Financial Statements
2. Financing Plan
Modify 3. Resulting Ratios
and
Revise Evaluation:
Is the preliminary plan a good one, or
Bad Plan should it be modified?
Good Plan
Final Projections:
1. Financial Statements
2. Financing Plan
3. Resulting Ratios
Relationship between Growth in Sales and Capital Requirements 10
Additional Required Spontaneous Increase
funds = increase increase in in retained
needed in assets liabilities earnings
A L
AFN = ( ) S - ( ) S - MS1(1-d)
S S
Example : S = $2,000: MS1 (1-d) = $900
AFV = (1.4) ($2,000) - (0.20) ($2,000) - $900
= $2,800 - $400 - $900
= $1,500
Cooley Textiles 11
Pro Forma Income Statement
December 31, 2006
(Thousands of Dollars)
2005 (1+g) Pro Forma
2006
Sales S0=$36,000 (1.15) S1=$41,400
Operating Costs 32,440 (1.15) 37,306
EBIT 3,560 4,094
Interest 560 644
EBT 3,000 3,450
Tax (40%) 1,200 1,380
Net Income 1,800 (1.15) 2,070
Dividends (45%) $810 $ 931.5
Addition to RE $990 $ 1,138.5
Cooley Textiles
12
Pro Forma Balance Sheet (Asset side)
December 31, 2006
(Thousands of Dollars)
Pro
Forma
2005 (1+g) Additions Pro AFN after AFN
Forma
Cash $1,080 (1.15) $1,242 $1,242
A/R 6,480 (1.15) 7,452 7,452
Inv. 9,000 (1.15) 10,350 10,350
T. Cur. 16,560 19,044 19,044
Asset
Fixed 12,600 (1.15) 14,490 14,490
Assets
Total $29,160 $4374 $33,534 $33,534
Assets
Cooley Textiles 13
Pro Forma Balance Sheet Continued
December 31, 2006
(Thousands of Dollars) Pro Forma
2005 (1+g) Additions Pro Forma AFN after AFN
A/P $4,320 (1.15) $648 $4,968 $4,968
Accruals 2,880 (1.15) 432 3,312 3,312
Notes 2,100 2,100 2155.5 4,255.5
Payable
Total C.L. 9,300 10,380 12,535.5
L.T.D. 3,500 3,500 3,500
Common 3,500 3,500 3,500
Stock
Retained 12,860 1138.5 * 13,998.5 13,998.5
Earnings
Total Liab. $29,160 $31,378.5 $33,534
& Equity
AFN= $2,155.5
4,374 – 648 – 432 - 1,138.5 = 2,155.5
4,374 – 1,080 – 1,138.5 = 2,155.5
AFN = (A/S0)S - (L/S0)S - MS1 (1-d) 14
29,160 4320+2880
AFN = ---------- x (5400) - --------------- x (5400) - 1138.5
36,000 36,000
AFN = 0.81 (5400) - .20 (5400) - 1138.5
AFN = 4374 - 1080 - 1138.5
AFN = 3294 - 1138.5
AFN = 2155.5
Cooley Textiles 15
Pro Forma Income Statement
December 31, 2006
(Thousands of Dollars)
1,800
M = Profit Margin = ------------- = 5%
36,000
S1 = 41,400 810
d = Dividend Payout Ratio = -------- = 45%
1,800
M S1 = 5% (41,400) = 2,070 = Net Income
Addition to RE = M S1 (1-d) = 1138.5
S = 41,400 - 36,000 = 5,400