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 (income statement, cashflow statement and cash budget)? 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 |
$4,250.00 |
| Operating costs excluding depreciation |
3,083.00 |
| EBITDA |
$1,167.00 |
| Depreciation |
300.00 |
| EBIT |
$867.00 |
| Interest |
170.00 |
| EBT |
$697.00 |
| Taxes (40%) |
278.80 |
| Net income |
$418.20 |
Looking ahead to the following year, the company's CFO has assembled this information:
- Year-end sales are expected to be 6% higher than $4.25 billion in sales generated last year.
- Year-end operating costs, excluding depreciation, will equal 60% of 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 in millions. For example, an answer of $10,550,000 should be entered as 10.55. Enter all values as positive numbers. Do not round intermediate calculations. Round your answers to two decimal places.
| |
(in millions of dollars) |
| Sales |
$ |
| Operating costs excluding depreciation |
|
| EBITDA |
$ |
| Depreciation |
|
| EBIT |
$ |
| Interest |
|
| EBT |
$ |
| Taxes |
|
| Net income |
$ |
Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 1 images
