 Forecasting Multiple Financial Items

Subject Business Financial Accounting

Question

1. Use the provided data to generate a forecast for Total revenue in 2016 using two different forecasting methods. Explain briefly the methods you use.

2. Use the Total revenue forecast from item 1, the percent of sales forecast method, other forecasting methods (of your choice) and calculation where appropriate to forecast Net income for 2016. This includes:
a. Forecast the 2016 value for income statement line items that can reasonably be forecast using percent of sales.
b. Use another forecast method to forecast the income statement line items for which percent of sales is not appropriate. Explain briefly the method you use for each of these line items. Forecasts using a method other than percent of sales must must include at least: Interest expense and Provision for income taxes, neither for which can be forecast using percent of sales.
c. Using the forecasts from question 1, 2a and 2b, create a Pro forma income statement for 2016 (that is, a forecast of the 2016 income statement) and calculate the projected Net income for 2016.

3a. Forecast the Total dividend and the Dividend per share for 2016. Explain your forecast method for each.
b. Calculate the projected Retained earnings for 2016.

4a. Use an appropriate method to forecast 2016 value for each of the balance sheet line items except Total assets, Total liabilities and Total stockholders’ equity as follows:
i. Use percent of sales method to forecast: Cash and cash equivalents, Marketable securities, Trade accounts and notes receivable, Financing Receivables, Other receivables, Equipment on operating leases, Inventories, Property and equipment, Other assets, Short-term borrowings, and Accounts payable and accrued expenses.
ii. Assume that Long-term borrowings, Common stock, and Common stock in treasury are unchanged from 2015, and that Retained earnings is as determined in 3b.
iii. Use an appropriate forecasting method to forecast all other balance sheet line items. Explain briefly the method used for each of these (e.g., percent of sales, or average arithmetic growth). (Of course, one method is to use the 2015 level as the forecast for 2016.)
b. Determine the projected change in net working capital from 2015 to 2016 (net working capital = current assets – current liabilities) and the projected net cash flow from increase/decrease in each long term asset line item.
c. Use the net income from 2c and change in net working capital and cash flow from long term assets in 4b to calculate the projected net cash flow for 2016.

5. Use the forecasts from 3b and 4a to generate a Pro forma balance sheet for 2016 (that is, a forecast of the 2016 balance sheet), including calculation of Total assets, Total liabilities, and Total stockholders’ equity. (Note that this balance sheet is not likely to balance.)

6. Calculate the external financing needed for 2016, i.e., (Total assets – (Total liabilities + Total stockholders’ equity).

See Question.xlsx

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