Forecasting (Ch. 3.3-3.6)
Net income
Profit margin × Sales
retention ratio (plowback ratio)
*Retained earnings/net income* Equal to 1 - dividend payout ratio
EFN (External Financing Needed)
(assets/sales) x projected change in sales ($) - (spontaneous liabilities/sales) x projected change in sales ($) - Profit Margin x projected sales x (1-dividend payout ratio) OR Total assets - Total liabilities and equity
dividend policy
A decrease in the percentage of net income paid out as dividends will increase the retention ratio. This increases both internally generated equity and thus increases sustainable growth. *retention ratio*
financial policy
An increase in the debt-equity ratio increases the firm's financial leverage. Because this makes additional debt financing available, it increases the sustainable growth rate. *debt-equity ratio*
Projected sales
Current sales × (1 + Sales growth rate)
Addition to retained earnings
Net income(1 - dividend payout ratio)
current sales
Next year's sales/(1 + growth rate)
ROE
Profit Margin x Total Asset Turnover x Equity Multiplier Net Income/Total Equity *Anything that increases ROE will increase sustainable growth rate*
capital intensity ratio
The higher the capital intensity ratio, the larger external financing needs will be, other things held constant. *Total assets / sales * Measures the amount of assets needed to generate one dollar of sales. Reciprocal of total asset turnover ratio
spontaneous liabilities to sales ratio
The higher the firm's spontaneous liabilities, the smaller external financing needs will be, other things held constant. Non interest bearing current liabilities: Accounts payable and accrued expenses
profit margin
The higher the profit margin, the smaller external financing needs will be, other things held constant. Increases the firm's ability to generate funds internally *operating efficiency* *Net Income/Sales*
sales growth
The higher the sales growth is, the larger external financing needs will be, other things held constant. $ amount growth in sales (change in sales)
dividend payout ratio
The lower the payout ratio, the smaller external financing needs will be, other things held constant. *Cash Dividends/Net Income* Amount of cash paid to shareholders expressed as a percentage of earnings.
total asset turnover
This increase will increase sales generated for each dollar in assets. This decreases the firm's need for new assets as sales grow and thereby increases the sustainable growth rate. Same as decreasing capital intensity. *asset use efficiency*
percentage of sales approach
a financial planning protocol that specifies balance sheet and income statement items as a proportion of sales.
accumulated retained earnings
accumulated profits reinvested in the business (surplus) Total assets-total liabilities=stockholders' equity-common stock
sustainable growth depends on...
profit margin dividend policy financial policy total asset turnover
projected change in sales
projected change in sales in dollars *Current sales × Sales growth rate*
internal growth rate
the maximum growth rate a firm can achieve with no external financing of any kind *(ROA x plowback ratio)/(1-ROA x plowback ratio)
sustainable growth rate
the maximum growth rate that can be achieved with no external *equity* financing while maintaining a constant debt-equity ratio *(ROE x plowback ratio)/(1-ROE x plowback ratio)
formula and pro forma financial statements
two methods of forecasting external financing needs