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