BWFM 5013 CORPORATE FINANCE

Case 1 :Financial Forecating (15%)

JT Industries' financial planners must forecast the company's financial results for the coming year. The forecast will be based o
of sales method, and any additional funds needed will be obtained as notes payable.
a. Assuming the historical trend continues, what will sales be in 2013? Base your forecast on a spreadsheet regression
analysis of the 2007-2012 sales data above, and include the summary output of the regression in your answer. By what
percentage are sales predicted to increase in 2013 over 2012? Is the sales growth rate increasing or decreasing?
Here are the company's historical sales. Hint: Use the Trend function to forecast sales for 2013.

Year
2007
2008
2009
2010
2011
2012
2013

Sales
129,215,000
180,901,000
235,252,000
294,065,000
396,692,000
455,150,000

Growth Rate
40.0%
30.0%
25.0%
34.9%
14.7%

% Increase in Predicted Sales for 2013 over 2012:

2012Sales
2013 Sales
% increase

455,150,000

Note: This growth rate has been declining over time.

b. JTs management believes that the firm will actually experience a 20 percent increase in sales during 2013. Construct 2013 p
financial statements. JT will not issue any new stock or long-term bonds. Assume JT will carry forward its current amounts of s
investments and notes payable, prior to calculating AFN. Assume that any Additional Funds Needed (AFN) will be raised as not
AFN is negative, JT will purchase additional short-term investments). Use an interest rate of 9 percent for short-term debt (and
interest income on short-term investments) and a rate of 11 percent for long-term debt. No interest is earned on cash. Use the be
year debt balances to calculate net interest expense. Assume that dividends grow at an 8 percent rate.
Key Input Data:
Tax rate
Dividend growth rate
S-T rd
L-T rd

Used in the
forecast
40%
8%
9%
11%

December 31 Income Statements:

(in thousands of dollars)
Forecasting

2012

2012
basis
Ratios
$455,150 Growth
$386,878 % of sales
$68,273
$7,388 % of fixed assets
$60,885
$8,575 Interest rate x beginning of year debt
$52,310
$20,924
$31,386
$12,554 Growth

Sales
Expenses (excluding depr. & amort.)
EBITDA
Depreciation and Amortization
EBIT
Net Interest Expense
EBT
Taxes (40%)
Net Income
Common dividends
Addition to retained earnings (RE)

$18,832

JT Industries December 31 Balance Sheets

(in thousands of dollars)
2012

Forecasting

2012

2013

basis

Ratios

Inputs

Assets:
Cash and cash equivalents
Short-term investments
Accounts Receivable
Inventories
Total current assets
Fixed assets

$91,450
$11,400
$103,365
$38,444
$244,659
$67,165

Total assets

$311,824

Liabilities and equity

Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained Earnings
Total common equity

$30,761
% of sales
$30,477
% of sales
$16,717
Previous
$77,955
$76,264
Previous
$154,219
$100,000
Previous
$57,605 Previous + RE
$157,605

Total liabilities and equity

$311,824

Required assets =
Specified sources of financing =
Additional funds needed (AFN) =
Required additional notes payable =

% of sales
Previous
% of sales
% of sales
% of sales

Additional short-term investments =

c. Now create a graph depicting the sensitivity of AFN for the coming year to the sales growth rate. To make this graph,
compare the AFN at sales growth rates of 5%, 10%, 15%, 20%, 25%, and 30%.
We can use a data table to answer this question:
Sales
2013 AFN
Growth rate
$0
$0
$0
$0
$0
$0
$0

d. Calculate the Net Operating Working Capital (NOWC), Total Operating Capital, and NOPAT for 2012
and 2013. Also, calculate the FCF for 2013.
Net Operating Working Capital
NOWC12 =

Operating CA

Operating CL

Operating CA

Operating CL

+
+

Fixed assets

=
=
NOWC13 =
=
=
Total Operating Capital
TOC12

NOWC

=
=
TOC13 =

NOWC

=
=

+
+

Fixed assets

(1-T)

Net Operating Profit After Taxes

NOPAT12 =

EBIT

=
=

NOPAT13 =

EBIT

x
x

(1-T)

NOPAT

Increase in TOC

=
=
Free Cash Flow
FCF13 =
=
=

e. Suppose JT can reduce its inventory to sales ratio to 5 percent and its cost to sales ratio to 83 percent. What happens to AFN a
Input
Inv. / Sales
Costs / Sales
FCF
AFN

Base Case

New Scenario
0.0%
5.0% Note: we used the Scenario Manager.
0.0%
83.0%

The forecast will be based o the percent

dsheet regression
ur answer. By what
decreasing?

ng 2013. Construct 2013 pro forma

ard its current amounts of short-term
(AFN) will be raised as notes payable (if
nt for short-term debt (and for the
earned on cash. Use the beginning of

2013

2013

Inputs

Forecast

eginning of year debt

2013
Without AFN

AFN

With AFN

To make this graph,

nt. What happens to AFN and FCF?

the Scenario Manager.