The AFN equation provides useful insights into the forecasting process, but this equation assumes that all...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The AFN equation provides useful insights into the forecasting process, but this equation assumes that all of the firm's key ratios remain constant, which is not likely to hold true. Consequently, it is useful to forecast the firm's financial statements. The firm begins with forecasting its -Select- which then feeds into the firm's balance sheet. Management looks at operating ratios and their relationship with industry and benchmark averages. The forecasted income statement begins with the prior year's income statement and is adjusted for the sales growth forecast. Some inputs for the income statement are not under the firm's control for example, tax and interest rates. The forecasted balance sheet is calculated from asset ratios that management has reviewed and changed based on industry and benchmark averages. An Excel spreadsheet is used for this analysis because changes in assumptions, financing, and ratios can be made to the statements to review alternative scenarios. The impact of these changes on the firm's forecasted financial statements ultimately can be used to improve the firm's operations. Quantitative Problem: At the end of last year, Edwin Inc. reported the following income statement (in millions of dollars): Sales Operating costs (excluding depreciation) EBITDA Depreciation $4,250.00 3,038.00 $1,212.00 320.00 $892.00 170.00 $722.00 288.80 $433.20 EBIT Interest EBT Taxes (40%) Net income Looking ahead to the following year, the company's CFO has assembled this information: Year-end sales are expected to be 4% higher than $4.25 billion in sales generated last year. • Year-end operating costs, excluding depreciation, are expected to increase at the same rates as sales. • Depreciation costs are expected to increase at the same rate as sales. • Interest costs are expected to remain unchanged. • The tax rate is expected to remain at 40%. On the basis of this information, what will be the forecast for Edwin's year-end net income? Enter your answers as positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. On the basis of this information, what will be the forecast for Edwin's year-end net income? Enter your answers as positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. Edwin Inc. Income Statement Sales Operating costs (excluding depreciation) EBITDA Depreciation EBIT Interest EBT Taxes (40%) Net income (in millions of dollars) $ $ $ The AFN equation provides useful insights into the forecasting process, but this equation assumes that all of the firm's key ratios remain constant, which is not likely to hold true. Consequently, it is useful to forecast the firm's financial statements. The firm begins with forecasting its -Select- which then feeds into the firm's balance sheet. Management looks at operating ratios and their relationship with industry and benchmark averages. The forecasted income statement begins with the prior year's income statement and is adjusted for the sales growth forecast. Some inputs for the income statement are not under the firm's control for example, tax and interest rates. The forecasted balance sheet is calculated from asset ratios that management has reviewed and changed based on industry and benchmark averages. An Excel spreadsheet is used for this analysis because changes in assumptions, financing, and ratios can be made to the statements to review alternative scenarios. The impact of these changes on the firm's forecasted financial statements ultimately can be used to improve the firm's operations. Quantitative Problem: At the end of last year, Edwin Inc. reported the following income statement (in millions of dollars): Sales Operating costs (excluding depreciation) EBITDA Depreciation $4,250.00 3,038.00 $1,212.00 320.00 $892.00 170.00 $722.00 288.80 $433.20 EBIT Interest EBT Taxes (40%) Net income Looking ahead to the following year, the company's CFO has assembled this information: Year-end sales are expected to be 4% higher than $4.25 billion in sales generated last year. • Year-end operating costs, excluding depreciation, are expected to increase at the same rates as sales. • Depreciation costs are expected to increase at the same rate as sales. • Interest costs are expected to remain unchanged. • The tax rate is expected to remain at 40%. On the basis of this information, what will be the forecast for Edwin's year-end net income? Enter your answers as positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. On the basis of this information, what will be the forecast for Edwin's year-end net income? Enter your answers as positive values. Enter your answers in millions. For example, an answer of $10,550,000 should be entered as 10.55. Do not round intermediate calculations. Round your answers to two decimal places. Edwin Inc. Income Statement Sales Operating costs (excluding depreciation) EBITDA Depreciation EBIT Interest EBT Taxes (40%) Net income (in millions of dollars) $ $ $
Expert Answer:
Answer rating: 100% (QA)
Given Yearend sales are expected to be 4 higher than 425 billion Yearend operating costs excluding d... View the full answer
Related Book For
Financial Management Theory And Practice
ISBN: 978-0176583057
3rd Canadian Edition
Authors: Eugene Brigham, Michael Ehrhardt, Jerome Gessaroli, Richard Nason
Posted Date:
Students also viewed these accounting questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
Alistair bought a house on 1 April 2000 for 125,000 and occupied the entire house as his principal private residence until 1 November 2008. As from that date, he rented out two rooms (comprising...
-
Use source transformation to find Io in the circuit in figure. ww 4 kn 18 V 36 kn 4 kn 6 kn 6 kn 2 mA( 3 1 mA
-
The head of a large labor union with a pension fund asks you, a pension consultant, to distinguish between investing and information-motivated trading. You are expected to provide an explanation that...
-
What is CREST?
-
Susan Scott has discovered a problem involving the mix of lye to the dry concrete mix that costs the company $20,000 in waste and $14,000 in lost business per period. There are two alternative...
-
Portsmouth Company makes upholstered furniture. Its only variable cost is direct materials. The demand for the company's products far exceeds its manufacturing capacity. The bottleneck (or...
-
Visit the web page of one of the associations listed under Careers in Operations Management and briefly list the targeted members and the services that they provide to their members.
-
3:04:20 Tater and Pepper Corp. reported free cash flows for 2021 of $52.1 million and investment in operating capital of $35.1 million. Tater and Pepper incurred $14.9 million in depreciation expense...
-
5. (40 points) Program HW. Huffman source compression for two sequences. (a) (5 points) Generate Source A with length 1000 which is an IID sequence, each with X~ Bern(1/4) for Vt (b) (5 points)...
-
There are 90 new houses being built in a neighborhood. Last month, 1/6 of them were sold. This month, 2/5 of the remaining houses were sold. How many houses are left to be sold?
-
Credit scores are normally distributed with a mean of 571 and a standard deviation of 104. What is the credit score of someone who is at the 84th percentile? If there are two answers, list both...
-
A company establishes a $470 petty cash fund on August 3 to pay for minor cash expenditures. The fund is replenished at the end of each month. In addition, the company has issued credit cards for...
-
In 2019, the St Louis Blues defeated the Boston Bruins in 7 games to win the Stanley Cup. The Stanley Cup finals requires one team to win 4 games in what is called a best of 7 series. Below is a...
-
7. Given the following logic network, x1 D- a. (5 pts) Write its Boolean expression b. (5 pts) Write its truth function c. (5 pts) Write its canonical sum-of-products form
-
What are some of the features of the Unified Process (UP)?
-
Lucas Mitchell, financial manager of Inland Industrial, has been asked by the firm's CEO to evaluate the company's inventory control techniques and to lead a discussion of the subject with the senior...
-
Six-month T-bills have a nominal rate of 7%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 5.5%. In the spot exchange market, one yen equals $0.012. If interest...
-
East Jet Airlines is an all-equity firm with a book value of $100,000,000 and 16,000,000 shares outstanding. Its stock currently trades at $9 per share, and EPS is $0.50. East Jet wishes to issue...
-
Why do you think there was a reduction of cases where fraud was detected by internal audit and internal controls in the 2006-2008 comparison survey by the ACFE? Does it mean that these elements of...
-
In 2005, a group of concerned shareholders of Johnson & Johnson requested the board of directors establish a policy of, whenever possible, separating the roles of the chair and CEO, so that an...
-
Evaluate the ethicality of the corporate governance systems at Microsoft based on the discussion in the text.
Study smarter with the SolutionInn App