Chapter 16 Financial Planning and Forecasting 521Fixed Inputs. Some other inputs required for the forecast are not under man-
agement’s direct control or are not expected to change. These inputs are shown in
Column G—the tax rate; the interest rate; the shares initially outstanding; the ini-
tial stock price; and the Fixed assets/Sales ratio, which the CFO concluded was
! ne. The number of shares outstanding will change in 2009 depending on how
much new equity the! rm must raise; but in this analysis, the other variables are
held constant. Of course, management hopes the stock price will increase as a
result of the! rm’s actions and improved! nancial position, but the CFO wisely
decided not to make a prediction at this point.
16-4b Part II. Forecasted Income Statement
The forecasted 2009 income statement starts with the 2008 income statement,
but forecasts that 2009 sales grow by 10%. Next, the assumed new operating
cost ratio is multiplied by the new sales level to calculate the forecasted 2009
operating costs, which are subtracted from sales to obtain the forecasted EBIT.
Interest expenses are calculated in Part V, the Notes section, after the interest-
bearing debt has been determined in the balance sheet developed in Part III.
Once the interest expense has been calculated and entered in the income state-
ment, the forecasted net income is determined. Dividends for 2009 are found by
multiplying the target payout ratio by the 2009 forecasted net income. Divi-
dends are then subtracted from net income to! nd the 2009 addition to retained
earnings.
16-4c Part III. Forecasted Balance Sheet
The forecasted 2009 balance sheet is developed from the 2008 statement. Cash and
! xed assets are multiplied by 1.1 because they increase at the same rate as sales
growth. Accounts receivable are found by multiplying the assumed 11% Receiv-
ables/Sales ratio (given in Part I) by sales, and inventories are found by multiply-
ing the 19% Inventories/Sales ratio (also given in Part I) by sales. We then sum the
four asset accounts to! nd forecasted 2009 total assets.
On the liabilities side, because payables and accruals grow at the same rate as
sales, we multiply the 2008 values by 1.10. Also, 2009 retained earnings are found
by adding the 2009 addition to retained earnings from the income statement to
2008 retained earnings. To complete the balance sheet, we need to! nd the amounts
for short-term bank debt, bonds, and new common stock. To obtain those values,
we skip down to Part V, the Notes section. Here we multiply the target debt ratio
times the just calculated total assets to obtain the forecasted total debt amount. We
then subtract payables and accruals from this amount to! nd the forecast for
interest-bearing debt (which includes bank loans and bonds). Next, we multiply
the interest-bearing debt by the 2008 proportions of bank debt and long-term
bonds to! nd the forecasted amounts for those two items. Similarly, we! nd the re-
quired amount of 2009 total equity by multiplying (1 – target debt ratio) times the
forecasted assets. We then subtract forecasted retained earnings to! nd 2009 com-
mon stock, which we insert in the balance sheet. When we sum the liability and
equity accounts, the total matches the forecasted assets, which it must.
16-4d Part IV. Ratios and EPS
With the 2009 income statement and balance sheet forecasted, we can calculate
the forecasted 2009 ratios and EPS; those calculations are done in Part IV. The
! rst! ve ratios shown are the same ones given in the Part I Inputs section.
We calculated them from the forecasted statement as a check on the accuracy of
the model.