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Problem Set: Financial Projections
Question:
Buckeye Computer, Inc. produces high performance image generators for simulation (including PC-based visual system products) and visual workstations for high-end graphics applications. Its financial statements are shown in Exhibit 1 (excel filed posted on Canvas).
Suppose Buckeye management sets an annual revenue growth target of 20%. Estimate the free cash flows each year for the next five years 2014-2018. Use the following information to make your projections:
- Project all items (i.e. apart from sales) based on the 5-year historical average financial ratios all measured directly relative to sales** (e.g. Inventory/Sales).
- Assume a tax rate of 35%.
- There are two types of fixed assets: PPE and Other Fixed Assets. Both of them are part of the firm's operations and are measured net of depreciation.
- Other Current Assets refers to prepaid expenses related to the operations of the business.
EXHIBIT 1BUCKEYE COMPUTER, INC. ($ millions)
Income Statement
2009
2010
2011
2012
2013
Sales
1,604
1,950
2,240
2,456
3,017
Cost of Goods Sold
842
1,020
1,226
1,517
1,739
R&D Expense
158
203
240
278
327
SG&A Expense
367
446
479
522
549
Operating Income (EBIT)
237
281
295
139
402
Interest Expense
8
6
5
13
14
Earnings before Tax
229
275
290
126
388
Income Taxes
85
108
107
40
141
Earnings (NI)
144
167
183
86
247
Dividends
0
18
28
45
49
to Retained Earnings
149
155
41
198
Balance Sheet
Cash
103
58
17
30
Accounts Receivable
219
283
328
349
431
Inventory
282
348
420
500
584
Other Current Assets
22
24
32
Current Assets
622
711
817
894
1,077
Plant, Property & Equipment (net)
410
482
536
610
686
Other Fixed Assets
39
61
Total Assets
1,064
1,232
1,398
1,553
1,824
Accounts Payable
145
177
233
285
Accrued Expenses
34
31
Short Term Debt
19
124
35
Current Liabilities
216
256
375
351
Long Term Debt
55
50
137
Net Worth
793
942
1,097
1,138
1,336
Liabilities & Net Worth
Verified Expert
The paper is about the details of Forecasting cash flow for future years. It talks about the method of calculation of various ratios using sales as the reference and using them to forecast the income statement and balance sheet for the future years. The given questions had provided the income statement and balance sheet for previous 5 years and using the ratio, the income statement and balance sheets were solved to determine the cash flow at the end of next 5 years. The paper has been prepared using Microsoft Excel.
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