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What do we need to do in order to translate the sales projections into projected financial statements?
Have a grasp on historical firm operations/results
Analyze previous relationships of items on financial statements
What is important when it comes to projecting the balance sheet?
Efficiency Ratios (current assets, current liabilities, and fixed assets)
Financing Decisions (Debt and Equity)
What is important when it comes to projecting the income statement?
Variable versus fixed operating costs
Depreciation and R&D expense and its relation to sales
Interest expense and income depend on financing decisions
What do we need to have a clear understanding of when it comes to projecting?
The firm’s operations, specifically, the relationship between sales and other items
How can we use efficiency ratios?
To project NWC needs
What should you distinguish between in your projections if possible?
Replacement needs and expansion needs
What is the Percentage of Sales Method?
Use the straight average of sales, costs, and cost margin; OR
Create a weighted average to bias toward more recent results
What is the formula for SG&A?
Gross Profit - Operating Income
Why are fixed assets difficult to project?
Although they depend on sales, the relation is not usually linear
What can we assume for Lump Fixed Assets?
Once you reach maximum capacity, that fixed assets can grow proportionately with sales
What are the two general types of CapEx Spending?
Expansion of productive capacity
Maintenance of current productive capacity (replacement needs)
When is expansion of productive capacity done?
When current capacity utilization rates are close to 100% and/or management is buying PP&E in anticipation of future sales growth
What are Full Capacity Sales?
Maximum sales achieved without expanding fixed assets
What must you know for Full Capacity Sales?
Current operating level
What is the current operating level in relation to full capacity sales particularly important to?
Manufacturing Companies
What is the formula for Current Sales?
Capacity Utilization * Full Capacity Sales
What do your sales projections have to match up with?
Your ability to produce product
What can you use to determine capital investment necessary to expand capacity if utilization is 100%?
Fixed Asset Turnover
What is the formula for Fixed Asset Turnover?
Sales/Net Fixed Assets
What is the formula for New Fixed Assets Required?
Sales Growth/Fixed Asset Turnover Ratio
How else can you determine how much in new sales you’ll get?
From an increase in CapEx
What does the Capital Intensity Ratio answer?
How efficient are we at using our fixed asset investment to generate sales?
What is the formula for the Capital Intensity Ratio?
Fixed Assets/Full Capacity Sales
What does it mean the lower the Capital Intensity Ratio is?
The more efficient I am (need fewer dollars of capital investment to generate $1 of sales)
Where can we find information on Fixed Asset Replacement/Maintenance?
In the footnotes
How do we approach Fixed Asset Replacement/Maintenance?
Go back several years to see what they say about how much of CapEx was for replacement of productive capacity
Compute past rates of spending; then compute the average rate
Assume that replacement CapEx will be at this average rate of spending
What do we assume about the various items in the balance sheet and income statement during modeling?
That they are related to sales as much as possible, but the relationships need not be linear
What makes the balance sheet balance?
The plug
What does the plug do?
It is a small number added to one side or the other to make everything work
What do we plug for?
Debt, sometimes cash, and sometimes equity
What is the choice of a plug related to?
The firm’s financing policy
What happens when we finance with debt?
Debt = Total Assets - Total Equity - Current Liabilities
What happens when we finance with both Debt and Equity?
Debt = Total Equity * Debt-Equity Target
Stock = Total Assets - Total Liabilities - Accumulated Retained Earnings
What happens if we finance with Cash and Debt?
Cash & Marketable Securities = Total Liabilities & Equity - Current Assets (non cash) - Net Fixed Assets
Debt = If Net Fixed Assets + Current Assets – Current Liabilities - Total Equity > Last Yrs Debt, Then NFA+CA-CL-Total Equity, Otherwise use Last Year’s Debt
Note 
Flashcard (33)