Illustration On AFN (FE 12)
Illustration On AFN (FE 12)
Illustration On AFN (FE 12)
Financial planning Additional Funds Needed (AFN) formula Pro forma financial statements
Sales forecasts Percent of sales method
$21.60 $32.40
1,250 1,000
Sales
8
(More)
10
11
14
Implications of AFN
If AFN is positive, then you must secure additional financing. If AFN is negative, then you have more financing than is needed.
Pay off debt. Buy back stock. Buy short-term investments.
15
More
16
More
17
More
18
Basing Interest Expense on Average of Beginning and Ending Debt Will accurately estimate the interest payments if debt is added smoothly throughout the year. But has problem of circularity.
More
19
20
COGS/Sales SGA/Sales Cash/Sales Acct. rec./Sales Inv./Sales Net FA/Sales AP & accr./Sales
Other Inputs
Percent growth in sales
Growth factor in sales (g) Interest rate on debt Tax rate
25%
1.25 10% 40%
40%
22
SGA
EBIT Interest
35% Sales13 =
0.1(Debt12) =
875.0
$125.0 20.0
EBT
Taxes (40%) Net Income
$105.0
42.0 $63.0
Div. (40%)
Add to RE
$25.2
$37.8 23
Total CL
L-T debt Common stk Ret earnings
$225.0
100.0 500.0 237.8
Total claims
$1,062.8
25
26
27
28
AP accruals Notes payable Total CL L-T Debt Common stk Ret earnings Total claims
+93.6
+93.6
30
Forecasted Ratios
Profit Margin ROE DSO (days) Inv turnover FA turnover Debt ratio TIE Current ratio 2012 2.70% 7.71% 43.80 8.33x 4.00x 30.00% 10.00x 2.50x 2013(E) Industry 2.52% 4.00% 8.54% 15.60% 43.80 32.00 8.33x 11.00x 4.00x 5.00x 40.98% 36.00% 6.25x 9.40x 31 1.96x 3.00x
Proposed Improvements
Before
DSO (days) 43.80
After
32.00
Accts. rec./Sales
Inventory turnover Inventory/Sales SGA/Sales
12.00%
8.33x 12.00% 35.00%
8.77%
11.00x 9.09% 33.00%
33
Impact of Improvements
Before AF Free cash flow ROIC (NOPAT/Capital) ROE $187.2 After $15.7
-$150.0
6.7% 7.7%
$33.5
10.8% 12.3%
34
How would the excess capacity situation affect the 2013 AFN?
The previously projected increase in fixed assets was $125. Since no new fixed assets will be needed, AFN will fall by $125, to:
$187.2 - $125 = $62.2.
36
Economies of Scale
1,100 1,000
Assets
2,000
2,500
$1,000/$2,000 = 0.5; $1,100/$2,500 = 0.44. Declining ratio shows economies of scale. Going from S = $0 to S = $2,000 requires $1,000 of assets. Next $500 of sales 37 requires only $100 of assets.
Lumpy Assets
1,500 Assets
1,000
500
Sales
500
1,000
2,000
38
A/S changes if assets are lumpy. Generally will have excess capacity, but eventually a small S leads to a large A.
39