Assignment - Pro forma financial statements, external capital needs and growth rates

Pro-forma financials using percentage of sales method;

1. Obtain financial statements for a company for the last three years. The company must meet the following criteria:

The company is not a financial company.

Each of current assets, current liabilities and long-term debt must be greater than zero for all three years.

The company must have paid a dividend in each of the last three years.

2. Determine the following from the company's financial statements for each of the last two or three years as indicated:

a. the total revenue, three years.

b. cost of revenue, two years.

c. total operating expenses, two years.

d. earnings before interest and taxes, two years

e. total interest paid, two years.

f. total income taxes paid, two years.

g. net income, two years.

h. total dividends paid, three years.

i. depreciation, two years.

j. net working capital, three years.

k. fixed assets, three years.

l. long term debt, three years.

m. total stockholders equity for the most recent year only.

3. Using the information from #2, compute the following for each of the last two years:

a. the growth rate in total revenue.

b. the ratio of cost of revenue plus total operating expenses minus depreciation to total revenue.

c. the ratio of depreciation to beginning of year fixed assets.

d. the ratio of net working capital to total revenue.

e. dividend payout ratio for the last two years.

f. the ratio of beginning of year fixed assets to total revenue.

g. the ratio of interest paid to beginning of year debt.

h. the ratio of total tax paid to earnings before tax.

4. Compute the average of each line item in #3. (That is, a. average annual revenue growth rate, b. average cash expense margin, c. average depreciation as a percent of fixed assets, etc.)

5. Using the company's most recent financial statements as the base and the values determined in #4, forecast operating cash flows for each of the next three years. Assume that revenue grows each year at the rate determined in #4a. This requires:

a. forecast sales based on prior year's sales

b. forecast cost of revenue and operating expenses based on same year sales forecast

c. forecast depreciation based on beginning of year fixed assets

d. EBIT calculated

e Interest based on beginning of year debt

f. earnings before tax calculated

g. tax calculated

h. net income calculated

i. operating cash flow calculated

6. Using the company's most recent financial statements as the base and the values determined in #4, forecast external funds needed by the company for investment in fixed assets, investment in net working capital and dividends for each of the next three years. (Assuming that all the external financing needs over the next three years are met by increasing/decreasing debt) This requires:

a. net working capital based on sales

b. change in net working capital calculated

c. fixed assets based on next year's forecast sales

d. change in fixed assets calculated

e. total dividends based on prior year's dividends

f. total external financing needed, calculated

g. long term debt calculated

7. Prepare simplified pro forma income statements and balance sheets for the next three years.

The income statement should include the following line items: revenue, cost of revenue and operating expenses, depreciation, EBIT, interest, earnings before taxes, tax, net income and operating cash flow.

The balance sheet should include the following line items: net working capital, net fixed assets, total assets, long-term debt, and equity.

Be sure to adjust income statement and balance sheet line items as appropriate to reflect the increase/decrease in long-term debt.

8. Using data from the most recent financial statement, calculate

a. the internal growth rate for the company.

b. the sustainable growth rate for the company.

9. Explain the meaning of the two growth rates from #8. Explain how each ratio relates to the external financing needs calculated in #6 for next year.