MANAGEMENT CONSULTANCY - Solutions Manual
CHAPTER 14 FINANCIAL FORECASTING I.
Questions 1. The pro-forma financial statements and cash budget enable the firm to determine its future level of asset needs and the associated financing that will be required. Furthermore, one can track actual events against the projections. Bankers and other lenders also use these financial statements as a guide in credit decisions. 2. The collections and purchase schedules measure the speed at which receivables are collected and purchases are paid. To the extent collections do not cover purchasing costs and other financial requirements, the firm must look to borrowing to cover the deficit. 3. Rapid growth in sales and profits is often associated with rapid growth in asset commitment. A P100,000 increase in sales may occasion a P50,000 increase in assets, with perhaps only P10,000 of the new financing coming from profits. It is very seldom that incremental profits from sales expansion can meet new financing needs. 4. The percent-of-sales forecast is only as goods as the functional relationship of assets and liabilities to sales. To the extent that past relationships accurately depict the future, the percent-of-sales method will give values that reasonably represent the values derived through the proforma statements and the cash budget.
II. Multiple Choice 1. 2. 3. 4. 5.
C A C A A
6. 7. 8. 9. 10.
B A C B A
11. 12. 13. 14. 15.
D C B C A
III. Problems PROBLEM 1 (ETC ELECTRONICS COMPANY) 14-1
16. 17. 18. 19.
B A A D
Chapter 14
Financial Forecasting
Cash Receipts Schedule + + +
Sales Cash Sales (10%) Credit Sales (90%) Collections (month after sale) 20% Collections (second month after sale) 80%
April P320,000 32,000 288,000
May P300,000 30,000 270,000
June P275,000 27,500 247,500
July P275,000 27,500 247,500
Aug. P290,000 29,000 261,000
Sept. P330,000 33,000 297,000
57,600
54,000
49,500
49,500
52,200
230,400
216,000
198,000
198,000
P311,900
P293,000
P276,500
P238,200
Total Cash Receipts
Cash Payments Schedule Purchases Payments (month after purchase - 40%) Payments (second month after purchase 60%) Labor Expense (10% of sales) Overhead Interest Payments Cash Dividend Taxes Capital Outlay Total Cash Payments
April P130,000
May P120,000
June P120,000
July P180,000
Aug. P200,000
Sept. P170,000
52,000
48,000
48,000
72,000
80,000
78,000
72,000
72,000
108,000
27,500 12,000 30,000 50,000 25,000
27,500 12,000
29,000 12,000
33,000 12,000 30,000
P270,500
P159,500
P185,000
25,000 300,000 P588,000
Cash Budget Cash Receipts....................................... Cash Payments..................................... Net Cash Flow....................................... Beginning Cash Balance........................ Cumulative Cash Balance...................... Monthly Borrowing or (Repayment)........ Cumulative Loan Balance....................... Marketable Securities Purchased........... (Sold) Cumulative Marketable Securities.......... Ending Cash Balance............................ * Cumulative Marketable Sec. (Aug.) Cumulative Cash Balance (Sept.) Required (ending) Cash Balance Monthly Borrowing
June P311,900 270,500 41,400 20,000 61,400 --11,400 11,400 50,000 P236,400 - 254,800 - 10,000 - P28,400
14-2
July P293,000 159,500 133,500 50,000 183,500 --133,500 -144,900 50,000
August P276,500 185,000 91,500 50,000 141,500 --91,500 -236,400 50,000
September P283,200 588,000 (304,800) 50,000 (254,800) *28,400 28,400 (236,400) 10,000
Financial Forecasting
Chapter 14
PROBLEM 2 (ODETTE ELECTRONICS) Required New Funds
=
∆S =
(10%) (P100 mil.)
∆S =
P10,000,000
(∆S)
−
A S (P10,000,000) −
RNF (millions) =
(∆S) − PS2 (1 − D)
L S
(P10,000,000) − .07
(P110,000,000) (1 − .40)
RNF
=
.85(P10,000,000) − .25(P10,000,000) − .07(P110,000,000) (.60)
=
P8,500,000 85 − P2,500,000 − P4,620,000 25 100 100 P1,380,000
=
PROBLEM 3 (TESS’ SHOPS, INC.) a) Required New Funds
=
(∆S)
−
(∆S) − PS2 (1 − D)
∆S =
15% x P300,000,000 = P45,000,000
RNF
=
(P45,000,000) −
(P45,000,000) − .08
(P345,000,000) (1 − .25) =
A L S S − .08 .80(P45,000,000) − .40(P45,000,000) (P345,000,000) (.75)
= RNF
=
240 120− P20,700,000 P36,000,000 − P18,000,000 300 300 (P2,700,000)
A negative figure for required new funds indicates that an excess of funds (P2.7 mil.) is available for new investment. No external funds are needed. 14-3
Chapter 14
b) RNF
Financial Forecasting
=
P36,000,000 − P18,000,000 − .095(P345,000,000) x (1 − .5)
=
P36,000,000 − P18,000,000 − P16,387,500
=
P1,612,500 external funds required
The net profit margin increased slightly, from 8% to 9.5%, which decreases the need for external funding. The dividend payout ratio increased tremendously, however, from 25% to 50%, necessitating more external financing. The effect of the dividend policy change overpowered the effect of the net profit margin change.
14-4
