Fundamentals of Financial Management (Concise 6th Edition)

520 Part 6 Working Capital Management, Forecasting, and Multinational Financial Management

both of which would improve the! rm’s ROE and EPS. Again, the CFO set initial tar-

gets between Allied’s 2008 ratios and the industry averages.

In addition, Allied’s debt ratio, at 53%, greatly exceeds the 40% industry aver-

age; and the! rm’s bankers have complained and indicated that the cost of debt

would decline if this ratio were lowered. Security analysts also have stated that

Allied’s stock is riskier than it would be if it had less debt, and that adversely

affects its price/earnings (P/E) ratio.

Similarly, Allied’s dividend payout ratio is above average, and the CEO and

several board members think that it should be lowered. This would provide more

funds to support growth, which stockholders may want.

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Part IV. Ratios and EPS

Operating costs/Sales

Receivables/Sales

Inventory/Sales

Debt ratio

Payout ratio

Inventory turnover

Days sales outstanding (DSO)

Total assets turnover

Assets/Equity (equity multiplier)

Times interest earned (TIE)

Pro!t margin

Return on assets (ROA)

Return on equity (ROE)

DuPont Calculations

Actual for 2008

Forecasted for 2009

Industry average data

Earnings per share (EPS)

Part V. Notes on Calculations

Assets in 2009 will change to this amount, from the balance sheet

Target debt ratio

Resulting total debt: (Target ratio)( 2009 Assets)

Less: Payables and accruals

Bank loans and bonds (= Interest-bearing debt)

Allocated to bank loans, based on 2008 proportions

Allocated to bonds, based on 2008 proportions

Interest expense: (Interest rate)(2009 Bank loans plus bonds)

Target equity ratio = 1 – Target debt ratio

Required total equity: (2009 Assets)(Target equity ratio)

Retained earnings, from 2009 balance sheet

Required common stock = Required equity – Retained earnings

Old shares outstanding (millions)

Increase in common stock = 2009 Stock – 2008 Stock

Initial price per share from input section

Change in shares = Change in stock/Initial price per share

New shares outstanding = Old shares + ∆ Shares

Old EPS = 2008 Net income/Old shares outstanding

New EPS = 2009 Net income/New shares outstanding

2008

90.54%

12.50%

20.50%

53.00%

48.94%

4.88

45.63

1.50

2.13

3.23

3.92%

5.88%

12.50%

×

days

×

×

×

×

days

×

×

×

×

days

×

×

×

2009E

89.50%

11.00%

19.00%

49.00%

47.00%

5.26

40.15

1.57

1.96

4.28

4.83%

7.58%

14.87%

Industry

87.00%

9.86%

9.17%

40.00%

45.00%

10.90

36.00

1.80

1.67

6.00

5.00%

9.00%

15.00%

Equity

Multiplier

(A/E)

Total Assests

Turnover

(S/A)

Pro!t Margin

N/S

= ROE

3.92%

4.83%

5.00%

1.50

1.57

1.80

2.13

1.96

1.67

12.5%

14.9%

15.0%

$2,101.0

49.00%

$1,029.5

-$ 220.0

$ 809.5

$ 103.5

$ 706.0

$ 80.9

51%

$1,071.5

$ 894.4

$ 177.1

50

$ 47.1

$ 23.06

2.04

52.04

$ 2.35

$ 3.06

12.79%

87.21%

$2.35 $3.06

Tabl e 16 - 2 Forecasted Financial Statements (Total Dollars and Shares in Millions)