Pro Forma Analysis Used for

Pro Forma Analysis

• Used for

• valuing firms
• granting credit
• acquiring companies
• planning strategy
• budgeting

• More art than science

Sales Forecast

• Typically, start with sales forecast

• fundamental factor determining firm’s 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

Income Statement Forecasts

• Cost of goods sold and S,G&A

• 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

• Coke’s will be 27% going forward

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

• PP&E

• 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

• 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

• Statement of cash flows follows from:

• income statement
• balance sheet

• Warning!!! Check frequently to ensure your numbers make sense