1. Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Financial Statement Analysis K R Subramanyam John J Wild

2. 9-2 9 CHAPTER Prospective Analysis

3. 9-3 To forecast financial statements’ items and identify the need for an additional financing fund. –Management: forecasts of financial performance examine the viability of companies’ strategic plans; be active in a financing plan. –Creditors & investors: useful to assess a company’s ability to meet debt service requirements; useful for valuing the firm. Importance

4. 9-4 Forecast Sales Project Income statement Project Balance sheet & the need for extra financing fund Project Statement of cash flows Projection Process

5. 9-5 Forecast sales Sales forecasts are a function of: 1) Historical trends 2) Expected level of macroeconomic activity 3) The competitive landscape 4) New versus old store mix

6. 9-6 Target Corporation Income Statements

7. 9-7 Target Corporation Balance Sheet

8. 9-8 Project Income statement Steps: 1.Project cost of goods sold and gross profit margins using historical averages as a percent of sales 2.Project SG&A expenses using historical averages as a percent of sales 3.Project depreciation expense as an historical average percentage of beginning-of-year depreciable assets 4.Project interest expense as a percent of beginning-of- year interest-bearing debt using existing rates if fixed and projected rates if variable 5.Project tax expense as an average of historical tax expense to pre-tax income

9. 9-9 Project Income Statement

10. 9-10 Target Corporation Projected Income Statement

11. 9-11 Project Balance Sheet Steps: 1.Project current assets other than cash, using projected sales or cost of goods sold and appropriate turnover ratios. 2.Project PP&E increases with capital expenditures estimate derived from historical trends or information obtained in the MD&A section of the annual report. 3.Project current liabilities other than debt, using projected sales or cost of goods sold and appropriate turnover ratios. 4.Obtain current maturities of long-term debt from the long-term debt footnote.

12. 9-12 Project Balance Sheet Notes to Financial Statements 2005: A current portion of long-term debt for 2006 is $751 mil.

13. 9-13 Target Corporation Balance Sheet

14. 9-14 Project Balance Sheet The difference between total projected assets and total projected liabilities & equity will increase in cash balance. If cash balance is too high (in percentage of sales): –Invest excess cash in marketable securities. –Reduce long-term debts. If cash balance is too low: –Increase additional long-term debt and/or common stock.

15. 9-15 Project Statement of Cash Flows Use indirect method Prepared from: –Projected Balance sheet –Projected Income statement

16. 9-16