Pro Forma Analysis

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Pro Forma Analysis

• Used for
• valuing firms
• granting credit
• acquiring companies
• planning strategy
• budgeting
• More art than science

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Sales Forecast

• Typically, start with sales forecast
• fundamental factor determining firms future
• drives other variables in firm
• Generally start with historic growth rates
• Break down by industry/geographic segment
• Adjust for know economic changes (e.g., Asia)
• Asymptote to steady-state economy growth
• E.g., Coke sales will grow 5 in 2003, and then
  grow 4.5 through 2004 and 4 thereafter

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Income Statement Forecasts

• Cost of goods sold and S,GA
• typically percentage of sales
• based on adjusted historic
• Coke CGS will be 30 going forward
• Coke SGA will be 40 going forward
• Interest is based on expected debt
• assumed constant 199 for Coke case
• Income tax expense is based on tax rates applied
  to pretax income
• Cokes will be 27 going forward

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Working Capital

• Accounts Receivable tie to sales and terms
• use accounts receivable turnover (or percent of
  sales)
• Inventories tie to cost of goods sold
• use inventory turnover (or percent of sales)
• Accounts payable tie to purchases and terms (or
  percent of sales)
• Other working capital typically ties to sales
• For convenience, we will assume
• Cash remains at constant percentage of sales
• Noncash WC of 750 in 2002, 850 in 2003 and
  growth with sales thereafter

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• PPE
• capital expenditures tie lead sales growth
• 950 in 2002, 1,100 in 03, with sales growth
  thereafter
• depreciation is based on capital expenditures
• 80 of capital expenditures
• Stock issuance/repurchase and long-term debt tie
  to capital needs
• Coke repurchases with excess cash

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• Dividends are a percent of earnings
• 45 going forward
• Retained earnings ties to dividends and net
  income
• We will assume all excess cash is used to
  repurchase shares

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• Statement of cash flows follows from
• income statement
• balance sheet
• Warning!!! Check frequently to ensure your
  numbers make sense