unit 3 module 6-financial forecasting

Question 1

financial forecasting

Answer 1

estimation of future financial outcome

Question 2

cross sectional data

Answer 2

data collected by observing many subjects (such as individuals, firms or countries/regions) at the same point in time, or without regard to differences in time.

Question 3

percentage of sales forecasting

Answer 3

it helps the firms determine how much additional funding will be necessary to support the forecasted change in sales.

Question 4

Spontaneous accounts

Answer 4

an account on the income statement or balance sheet that changes as sales change.

• income statement accounts: revenues, COGS, operating expenses, depreciation, taxes.
• balance sheet account: accounts receivable inventory accounts payable

Question 5

sustainable growth rate

Answer 5

the optimal growth from a financial perspective assuming a given strategy with clear defined financial frame conditions/ limitations.

Question 6

sustainable growth rate

Answer 6

the company’s maximum growth rate where they don’t have to use additional debt or equity to finance future growth

Question 7

Sustainable Growth Rate formula

Answer 7

SGR= ROE X (1-b)
ROE= Dupont equation or,
ROE= net income/ equity

Question 8

Sales Growth rate

Answer 8

the sales growth rate is what’s is used to forecast that income statement and balance sheet using the percentage of sales method forecasting.

Question 9

Sales growth rate formula

Answer 9

Sales Growth Rate= forecasts sales / last years sales - 1

Question 10

Discretionary financing needed (DFN or AFN)

Answer 10

refers to the additional resources that will be needed for a company to expand its operations.
-a way of calculating how much new funding will be required, so that the firm can realistically look at whether or not they will be able to generate the additional funding and therefore be able to achieve the higher sales level.

Question 11

Discretionary financing needed formula

Answer 11

DFN= assets - liabilities - equity

- if the number comes out positive DFN is needed.

Question 12

capacity planning

Answer 12

the process of determining the production capacity needed by an organization to meet changing demands for its products.

Question 13

4 ways of decreasing the need for DFN

Answer 13

1. slow sales growth
2. examine capacity constraints.
3. lower dividend payout
4. increase net margin

Question 14

Pro forma statement

companies merging

Answer 14

1. how much the company’s revenues will increase due to the merge.
2. if the merged company will increase research and development
3. how much the merged company’s income tax expense will increase