Topic 4: Financial Forecasting

Question 1

What is DFN?

Answer 1

Discretionary Financing Needed; a.k.a. EFN (External Financing Needed)

Question 2

What is the purpose of financial forecasting?

Answer 2

Determine how much $ the firm will need in the future.

Question 3

What is the main goal of financial forecasting?

Answer 3

Understand the implications of today’s decisions on tomorrow’s performance.

Question 4

Name the 6 steps of the % of sales method.

Answer 4

1. Project Sales Revenue & Expenses (given)
2. Forecast the change in spontaneous B.S. accounts (determine the change in assets, given the change in sales).
3. Deal with Discretionary Accounts

4.

Question 5

Use % of Sales Method IF:

Answer 5

The item is spontaneous (varies directly with sales).

*If discretionary (non-spontaneous), find additional info. or make a reasonable assumption.

Question 6

The pro forma I.S. is linked to the B.S. in which 3 ways?

Answer 6

1. Retained Earnings from the forecasted income statement increase the forecasted equity account on the balance sheet.
2. Depreciation from the forecasted I.S. decreases the forecasted Fixed Assets (PP&E) on the B.S.
3. Forecated Interest expense on the I.S. depends on the interest-bearing liabilities on the forecasted B.S.

Question 7

New Retained Earnings =

Answer 7

Forecasted Net Income - Forecasted Dividends Paid

Question 8

New Net Fixed Assets (PP&E) =

Answer 8

Prior Net Fixed Assets - Forecasted Depreciation + Forecasted CAPEX

Question 9

Examples of Discretionary Accounts

Answer 9

Long-term debt, notes payable, common stock

*All deal with the financing of the firm

Question 10

Are Fixed Assets usually spontaneous or discretionary? What’s the exception?

Answer 10

Usually discretionary.

If the firm is operating at full capacity, they may adjust spontaneously.