Fundamentals of Financial Management (Concise 6th Edition)

Chapter 16 Financial Planning and Forecasting 519

Adjustable Inputs

The inputs in Column C show key 2008 ratios that management controls and that
may be adjusted in the future. Column D gives the values the CFO used for the initial
2009 forecast, and Column E gives industry average numbers. The! rst input shown
is the growth rate. This number can be changed; but throughout Table 16-2, a 10%
growth rate is assumed. Next, we have the Operating costs/Sales ratio. Allied’s ratio
in 2008 was 90.54%, which is higher than the industry’s 87% ratio. A reduction toward
the industry average would lead to a substantial improvement in net income, and
the CFO used as a tentative target for 2009 a ratio of 89.5%. Next, we saw in Chapter 4
that Allied’s receivables and inventories were too high relative to its sales. If those
accounts can be reduced, the result will be lower bad debts and storage costs and
thus increased pro! ts. Also, the excess capital invested in receivables and inven-
tories can be released and used to pay off debt and/or to repurchase common stock,

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A B C D E F G

Part I. Inputs

Part II. Income Statements

Sales

Operating costs (includes depreciation)

Earnings before interest and taxes (EBIT)

Less interest expense

Earnings before taxes (EBT)

Taxes

Net income (NI)

Dividends

Addition to retained earnings

Part III. Balance Sheets

Assets

Cash

Accounts receivable

Inventories

Fixed assets (grow with sales)

Total assets

Liabilities and Equity

Payables + accruals (both grow with sales)

Short-term bank loans

Total current liabilities

Long-term bonds

Total debt

Common stock

Retained earnings

Total common equity

Total liabilities and equity

Growth rate, g

Operating costs/Sales

Receivables/Sales

Inventories/Sales

Debt ratio

Payout ratio

2008

NA

90.54%

12.50%

20.50%

53.00%

48.94%

Industry

NA

87.00%

9.86%

9.17%

40.00%

45.00%

Fixed Inputs

Tax rate (T)

Interest rate

Shares out'ing

Price per share

FA/Sales

2008

$3,000.0

2,716.2

$ 283.8

88.0

$ 195.8

78.3

$ 117.5

$ 57.5

$ 60.0

Change

(1 + g)

0.895

See notes

EBT(T)

NI(Payout)

40%

10.00%

50

$23.06

33.33%

2009

$3,300.0

2,953.5

$ 346.5

80.9

$ 265.6

106.2

$ 159.3

$ 74.9

$ 84.4

2008

$ 10.0

375.0

615.0

1,000.0

$2,000.0

$ 200.0

110.0

$ 310.0

750.0

$1,060.0

130.0

810.0

$ 940.0

$2,000.0

Change

(1 + g)

0.1100

0.1900

(1 + g)

(1 + g)

See notes

See notes

See notes

$84.4

2009

$ 11.0

363.0

627.0

1,100.0

$2,101.0

$ 220.0

103.5

$ 323.5

706.0

$1,029.5

177.1

894.4

$1,071.5

$2,101.0

2009

10.00%

89.50%

11.00%

19.00%

49.00%

47.00%

Adjustable Inputs

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

(Continued)