Pro Forma Financial Statements

1
Pro Forma Financial Statements

• Three important uses
• Forecast the amount of external financing that
  will be required
• Evaluate the impact that changes in the operating
  plan have on the value of the firm
• Set appropriate targets for compensation plans

2
Steps in Financial Forecasting

• Forecast sales
• Project the assets needed to support sales
• Project internally generated funds
• Project outside funds needed
• Decide how to raise funds
• See effects of plan on ratios and stock price

3
2001 Balance Sheet(Millions of )
Cash sec.
20
Accts. pay.
accruals
100
Accounts rec.
240
Notes payable
100
Inventories
240
Total CL
200
Total CA
500
L-T debt
100
Common stk
500
Net fixed
Retained
assets
earnings
200
500
Total assets
1,000
Total claims
1,000


4
2001 Income Statement(Millions of )
2,000.00
Sales
Less COGS (60)
1,200.00
700.00
SGA costs
EBIT
100.00
16.00
Interest
EBT
84.00
Taxes (40)
33.60
Net income
50.40
Dividends (30)
15.12
Addn to RE
35.28
5
AFN (Additional Funds Needed)Key Assumptions

• Operating at full capacity in 2001.
• Each type of asset grows proportionally with
  sales.
• Payables and accruals grow proportionally with
  sales.
• 2001 profit margin (2.52) and payout (30) will
  be maintained.
• Sales are expected to increase by 500 million.
  (?S 25)

6
Assets must increase by 250 million. What is
the EFN, based on the EFN equation?
(1,000/2,000)(500) -
(100/2,000)(500) - 0.0252(2,500)(1 -
0.3) 180.9 million.
7
Projecting Pro Forma Statements with the Percent
of Sales Method

• Project sales based on forecasted growth rate in
  sales
• Forecast some items as a percent of the
  forecasted sales
• Costs
• Cash
• Accounts receivable

8

• Items as percent of sales Inventories
• Net fixed assets
• Accounts payable and accruals
• Choose other items
• Debt (which determines interest)
• Dividends (which determines retained earnings)
• Common stock

9
Percent of Sales Inputs
2001 2002 Actual Proj.

• COGS/Sales 60 60
• SGA/Sales 35 35
• Cash/Sales 1 1
• Acct. rec./Sales 12 12
• Inv./Sales 12 12
• Net FA/Sales 25 25
• AP accr./Sales 5 5

10
Other Inputs

• Percent growth in sales 25
• Growth factor in sales (g) 1.25
• Interest rate on debt 8
• Tax rate 40
• Dividend payout rate 30

11
2002 1st Pass Income Statement
2002 1st Pass
Factor
2001
Sales
2,000
g1.25
2,500
Less COGS
Pct60
1,500
SGA
Pct35
875
EBIT
125
Interest
16
16
EBT
109
Taxes (40)
44
Net. income
65
Div. (30)
19
Add. to RE
46
12
2002 1st Pass Balance Sheet (Assets)
Forecasted assets are a percent of forecasted
sales.
2002 Sales 2,500
2002 1st Pass
Factor
Cash
25
Pct 1
Accts. rec.
300
Pct12
300
Inventories
Pct12
Total CA
625
Net FA
625
Pct25
Total assets
1,250
13
2002 1st Pass Balance Sheet (Liabilities)
2002 Sales 2,500
2002
2001
Factor
1st Pass
AP/accruals
Pct5
125
Notes payable
100
100
Total CL
225
L-T debt
100
100
Common stk.
500
500
Ret. earnings
200
46
246
Total claims
1,071
From 1st pass income statement.
14
What are the additional funds needed (AFN)?

• Forecasted total assets 1,250
• Forecasted total liab. 1,071
• Forecast AFN 179

SEC must have the assets to make forecasted
sales. The balance sheets must balance. So, we
must raise 179 externally.
15
Example

• Your company is trying to determine its
  additional funds needed to support an increase in
  sales of 20. Your current level of sales is
  905, your total assets are 1427, your profit
  margin is 9.8 and will remain constant. If your
  company maintains a constant payout ratio of 40
  and expects liabilities to increase by 110.4 as a
  result of the 20 increase in sales, what
  additional funding will be needed to support the
  increase in sales?