Chapter 14 - Financial Forecasting

MANAGEMENT CONSULTANCY - Solutions Manual
CHAPTER 14
FINANCIAL FORECASTING
I.
Questions
1. The pro-forma financial statements and cash budget enable the firm to
determine its future level of asset needs and the associated financing that
will be required. Furthermore, one can track actual events against the
projections. Bankers and other lenders also use these financial statements
as a guide in credit decisions.
2. The collections and purchase schedules measure the speed at which
receivables are collected and purchases are paid. To the extent collections
do not cover purchasing costs and other financial requirements, the firm
must look to borrowing to cover the deficit.
3. Rapid growth in sales and profits is often associated with rapid growth in
asset commitment. A P100,000 increase in sales may occasion a P50,000
increase in assets, with perhaps only P10,000 of the new financing coming
from profits. It is very seldom that incremental profits from sales
expansion can meet new financing needs.
4. The percent-of-sales forecast is only as goods as the functional
relationship of assets and liabilities to sales. To the extent that past
relationships accurately depict the future, the percent-of-sales method will
give values that reasonably represent the values derived through the proforma statements and the cash budget.
II. Multiple Choice

1.
2.
3.
4.
5.
C
A
C
A
A
6.
7.
8.
9.
10.
B
A
C
B
A
11.
12.
13.
14.
15.
D
C
B
C
A
III. Problems
PROBLEM 1 (ETC ELECTRONICS COMPANY)
14-1
16.
17.
18.
19.
B
A
A
D
Chapter 14
Financial Forecasting
Cash Receipts Schedule

+
+
+
Sales
Cash Sales (10%)
Credit Sales (90%)
Collections (month
after sale) 20%
Collections
(second month
after sale) 80%
April
P320,000
32,000
288,000
May
P300,000
30,000
270,000
June
P275,000
27,500
247,500
July
P275,000
27,500
247,500
Aug.
P290,000
29,000
261,000
Sept.
P330,000
33,000
297,000
57,600
54,000
49,500
49,500
52,200
230,400
216,000
198,000
198,000
P311,900
P293,000
P276,500
P238,200
Total Cash
Receipts
Cash Payments Schedule

Purchases
Payments (month after
purchase - 40%)
Payments (second
month after purchase 60%)
Labor Expense (10% of
sales)
Overhead
Interest Payments
Cash Dividend
Taxes
Capital Outlay
Total Cash Payments
April
P130,000
May
P120,000
June
P120,000
July
P180,000
Aug.
P200,000
Sept.
P170,000
52,000
48,000
48,000
72,000
80,000
78,000
72,000
72,000
108,000
27,500
12,000
30,000
50,000
25,000
27,500
12,000
29,000
12,000
33,000
12,000
30,000
P270,500
P159,500
P185,000
25,000
300,000
P588,000
Cash Budget
Cash Receipts.......................................
Cash Payments.....................................
Net Cash Flow.......................................
Beginning Cash Balance........................
Cumulative Cash Balance......................
Monthly Borrowing or (Repayment)........
Cumulative Loan Balance.......................
Marketable Securities Purchased...........
(Sold)
Cumulative Marketable Securities..........
Ending Cash Balance............................
* Cumulative Marketable Sec. (Aug.)
Cumulative Cash Balance (Sept.)
Required (ending) Cash Balance
Monthly Borrowing
June
P311,900
270,500
41,400
20,000
61,400
--11,400
11,400
50,000
P236,400
- 254,800
- 10,000
- P28,400
14-2
July
P293,000
159,500
133,500
50,000
183,500
--133,500
-144,900
50,000
August
P276,500
185,000
91,500
50,000
141,500
--91,500
-236,400
50,000
September
P283,200
588,000
(304,800)
50,000
(254,800)
*28,400
28,400
(236,400)
10,000
Chapter 14
PROBLEM 2 (ODETTE ELECTRONICS)

Required New Funds
S =
(10%) (P100 mil.)
S =
P10,000,000
(S)
A
S
(P10,000,000)
RNF (millions) =
(S) PS2 (1 D)
L
S
(P10,000,000) .07
(P110,000,000) (1 .40)
RNF
.85(P10,000,000) .25(P10,000,000) .07(P110,000,000) (.60)
P8,500,000
85 P2,500,000 P4,620,000
25
100
100
P1,380,000
PROBLEM 3 (TESS SHOPS, INC.)

a) Required New Funds
(S)
(S) PS2 (1 D)
S =
15% x P300,000,000 = P45,000,000
RNF
(P45,000,000)
(P45,000,000) .08
(P345,000,000) (1 .25)
=
A
L
S
S .08
.80(P45,000,000) .40(P45,000,000)
(P345,000,000) (.75)
=
RNF
240
120 P20,700,000
P36,000,000
P18,000,000
300
300
(P2,700,000)
A negative figure for required new funds indicates that an excess of funds
(P2.7 mil.) is available for new investment. No external funds are needed.
14-3
Chapter 14
b) RNF
P36,000,000 P18,000,000 .095(P345,000,000)

x (1 .5)
P36,000,000 P18,000,000 P16,387,500
P1,612,500 external funds required
The net profit margin increased slightly, from 8% to 9.5%, which

decreases the need for external funding. The dividend payout ratio
increased tremendously, however, from 25% to 50%, necessitating more
external financing. The effect of the dividend policy change overpowered
the effect of the net profit margin change.
14-4

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What are the main components of a cash budget?

What factors determine the required new funds for a company?

MANAGEMENT CONSULTANCY - Solutions Manual

II. Multiple Choice

Cash Receipts Schedule

Cash Payments Schedule

PROBLEM 2 (ODETTE ELECTRONICS)

(10%) (P100 mil.)

.85(P10,000,000) .25(P10,000,000) .07(P110,000,000) (.60)

PROBLEM 3 (TESS SHOPS, INC.)

15% x P300,000,000 = P45,000,000

P36,000,000 P18,000,000 .095(P345,000,000)

P36,000,000 P18,000,000 P16,387,500

P1,612,500 external funds required

The net profit margin increased slightly, from 8% to 9.5%, which

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