Based on her experience with annual short

$-$

term forecasts, she believes she will be able to carry out long

$-$

term financial planning in the coming year. Currently, Sara determined that revenue is $

$3$

$,$

$0$

$0$

$0$

$,$

$$and the marketing department anticipates a

$1$

$0$

$\%$

$$increase in sales next year. Tables

$1$

$$and

$2$

$$provide estimates of selected balance sheet items for the current year.

Based on the accounting data provided to her, Sara convened a meeting with the CEO and other top managers to discuss the implementation of an annual financial forecast. All agreed to work with her to complete this plan. Using industry standards as a benchmark, they were able to review and compare the ratios They all recognized that significant steps should be taken to improve the firm's financial performance in the coming year. Sara informed them that a lack of coordination and integrated financial plans could lead to the firm's takeover and the loss of all their jobs. Assume you were recently hired as Sara's assistant to help her prepare financial projections for the next fiscal year. Sara asks that you start your task by accumulating latest data from the various departments on production, inventory, receivables, and payables. Through your research, you can get the following important details from the department's managers and the financial officer;

a

$.$

$$XYZ aims to reduce its average collection period

$($

measured by Days Sales Outstanding

$)$

$$from

$4$

$2$

$.$

$6$

$$to

$3$

$5$

$$days in the coming year. This reduction is due to of a recent change in credit terms offered to clients. The receivables manager expects to meet this target goal by providing discount incentives to encourage prompt payment as well as favorable credit terms. The receivables manager intends to achieve this target by offering discount incentives to motivate early repayment as well as favorable terms for credit.

b

$.$

$$A recently introduced inventory management system that optimizes the flow of plumbing parts has yielded promising results. This improved efficiency is expected to increase inventory turnover from five

$($

this year

$)$

$$to six times per year in the coming year.

c

$.$

$$XYZ

$\text{'}$

s construction workers' wages are tied to the cost

$-$

of

$-$

living adjustment

$($

COLA

$)$

$.$

$$The current recession has resulted in a negative COLA figure. According to the payables manager, this wage reduction is expected to result in a lower operating costs

$-$

to

$-$

sales ratio from

$9$

$3$

$.$

$3$

$3$

$\%$

$$current year to

$9$

$0$

$\%$

$$next year.

d

$.$

$$Sara has decided to redeem XYZ

$\text{'}$

s high

$-$

rate bonds issued six years ago at a new low rate, as interest rates are currently at a historic low. This will reduce XYZ

$\text{'}$

s the liability

$-$

to

$-$

asset ratio to

$3$

$0$

$\%$

$.$

e

$.$

$$XYZ

$\text{'}$

s current dividend payout ratio is

$2$

$8$

$.$

$9$

$9$

$\%$

$.$

$$Sara plans to reduce this ratio to

$2$

$5$

$\%$

$$of retained earnings to allow for future growth. Sara believes that the dividend cut will have little negative impact on the company's value because shareholders have historically preferred capital gains over cash dividends.

f

$.$

$$In computing ratios, they use year

$-$

end figures rather than average values

g

$.$

$$Projected stock price

$=$

$($

current P

$/$

E multiplied by projected EPS

$)$

h

$.$

$$The year

$=$

$3$

$6$

$5$

$$days$.$

REQUIREMENTS

$($

Please show all your calculations. If you use Excel, please insert the function that allows me to follow your calculations

$)$

$.$

$1$

$.$

$$Prepare the income statement and balance sheet for the current year.

$2$

$.$

$$Prepare the projected income statement and balance sheet for the coming year using the

following assumptions:

$($

a

$)$

$$Cash$,$ fixed assets, payables, and accruals change with the sales

$$

$$change$.$

$($

b

$)$

$$the current composition of interest

$-$

bearing debts, which includes short

$-$

term bank loans and long

$-$

term bonds, will be the same for the following year;

$($

c

$)$

$$a

$4$

$0$

$\%$

$$tax rate;

$($

d

$)$

$$a

$1$

$0$

$\%$

$$interest rate on all interest

$-$

bearing debts; and

$3$

$.$

$$XYZ

$\text{'}$

s common stock currently trades at $

$2$

$3$

$.$

$0$

$5$

$.$

$$If all assumptions are met, what is your forecast for XYZ

$\text{'}$

s stock a year from now based on today's P

$/$

E ratio?

$4$

$.$

$$If XYZ

$\text{'}$

s growth rate is only

$6$

$\%$

$$next year, and all other assumptions are met, what will the stock price be

$?$

$5$

$.$

$$If this growth rate proves to be higher than expected at

$1$

$2$

$\%$

$,$

$$how much will this stock be worth a year from now?

$6$

$.$

$$XYZ has a

$5$

$0$

$\%$

$$chance of growing at

$1$

$0$

$\%$

$$next year,

$3$

$0$

$\%$

$$at

$6$

$\%$

$,$

$$and

$2$

$0$

$\%$

$$at the maximum rate of

$1$

$2$

$\%$

$.$

$$Based on these three scenarios, what is your forecast for XYZ

$\text{'}$

s stock price next year?

Table

$1$

: Selected Balance Sheet Items

$$

$$Current Year Cash $

$5$

$0$

$$Accounts receivables

$?$

$?$

$$Inventories

$?$

$?$

$$Fixed assets

$1$

$,$

$0$

$0$

$0$

$$Payables and Accruals $

$2$

$0$

$0$

$$short

$-$

term bank loans

$1$

$0$

$0$

$$Long

$-$

term bonds

$7$

$5$

$0$

$$Common stock

$($

$5$

$0$

$$common shares outstanding

$)$

$$$

$1$

$5$

$0$

$$Retained earnings

$8$

$0$

$0$