Financial Forecasting in Excel

Instructions: For Computer Lab 1, you should complete the Computer Lab 1 spreadsheet based on the lab instructions. Use your spreadsheet to answer all the questions contained in the lab. 

Note: I have included a spreadsheet with the solutions to aid you, but please attempt the lab without using the solutions first.

Computer Lab 1 spreadsheet

Computer Lab 1 solutions

Computer Lab #1 Instructions

Part A: Create Pro Forma Financial Statements

This spreadsheet is set up so that yellow cells contain numbers and white cells contain formulas. Follow the steps below to prepare pro formas for 20X4, assuming that New England Corporation will make up any funding shortfall with long-term debt and will use any funding surplus to pay down long-term debt (let long-term debt be the plug figure).

As a starting point, assume that sales growth in 20X4 will be equal to 12.5%. Enter this figure in the Key Assumptions section in cell C4, and then, in cell C11, enter the formula for projected sales in 20X4, which is = B11*(1+C$4). This will give you sales 12.5% higher than in 20X3. (Although you could just calculate that number and enter it in the cell, doing that would defeat the purpose of the spreadsheet. By entering a formula, we can change the growth rate later, and everything adjusts accordingly. Remember, in Excel, always enter formulas instead of numbers when possible.)

Fill in the 20X4 forecast for each item that would be expected to vary with sales. Again, enter formulas. These will be similar to the formula in number 1 because we are just increasing these items by the sales growth rate. Putting the $ in front of the 4 means that you have locked in the reference to the growth rate, so if you copy and paste that formula into other cells that also grow with sales, you will have the correct formula. Assume, for simplicity, that depreciation expense grows in proportion to sales.

1. Fill in all of the cells in the 20X4 forecast that are just formulas (for example, pretax income is just EBIT-interest expense, and total current assets is just the sum of all the current assets).

2. Fill in the other items that would not be expected to vary with sales; that is, everything else except for long-term debt. Assumptions for the dividend payout ratio and tax rate should be made in the Key Assumptions section. For these, assume that a 20X4 projection equal to 20X3, that no new equity will be issued in 20X4, and that the current portion of long-term debt stays the same as 20X3.

3. Fill in long-term debt as the plug figure. This will be the balancing item that makes assets = liabilities + equity, but don’t enter the formula as total assets − (total liabilities + equity) or you will get a circular reference. Instead, you need to make the formula be total assets − current liabilities − total equity. This will balance the balance sheet and will not be circular.

Question 1: Under the assumptions outlined above, what level of long-term debt will be required by New England Corporation in 20X4?

Question 2: What is the projected net income for New England Corporation in 20X4?

Part B: Scenario Analysis

1. Contraction. Assume that increased competition and a depressed economy limit sales growth to 5% in 20X4. As a result, you cut planned capital expenditures to 20 in 20X4. In addition, rising interest rates increase your interest expense for 20X4 to 10.5%.

Question 3: Under the contraction scenario, what level of long-term debt will be required in 20X4?

Question 4: What is the projected net income?

2. High growth. Unexpected demand pushes sales growth to 25% in 20X4. The interest rate remains at 8.5%. To handle the growth, planned capital expenditures are increased to 65.

Question 5: Under the high-growth scenario, what level of long-term debt will be required in 20X4?

Question 6: What is the projected net income?

Part C: Break-Even Decisions

Return sales growth back to 12.5% and capital expenditures back to 40. Assume now that New England Corporation has determined that they cannot exceed $125 million in long-term debt, so they are looking for other ways to remedy the shortfall in financing. Determine what changes they would have to make under the following options:

Question 7: What if they opt to remedy the shortfall by reducing sales growth? What is the highest growth rate they could achieve and not exceed the debt limit?

You could keep trying different sales growth figures until you find the one that puts long-term debt at 125; however, it is much better to answer this question using the Goal Seek tool. This is found under the Tools menu in Excel.

What you want to do is find the sales growth that sets long-term debt equal to 125. So you set cell C47 (long-term debt) to a value of 125 by changing cell C4 (sales growth). Enter these figures and press OK, and you will have the solution.)

Question 8: Return sales growth to its initial level of 12.5%. Now suppose that they want to remedy the shortfall by cutting the dividend payout ratio. Will this get them under the debt ceiling of $125 million?

Part D: Sensitivity Analysis

Return all assumptions to their initial (Part A) values, including making the dividend payout ratio the same as in 20X3.

Now we will create a data table to more interactively demonstrate how the requirements for long-term debt respond to sales growth.

1. In a series of cells in a blank part of the spreadsheet (lets put them in F8 through J8) enter a series of growth rates we may want to test on the model. Let’s try 5%, 10%, 15%, 20%, and 25%.

2. In the cell one down and one to the left from your first value (E9 if your first value is in F8), set the cell equal to the projected long-term debt in 20X4 with the formula =C47 (if projected long-term debt for 20X4 is in C47).

3. Now, with your cursor, highlight one block of cells that takes in the values and the formula you entered (it should be 2 rows and 6 columns).

4. With that block still highlighted, choose the option Table under the Data menu. (For Microsoft Office 2007, choose Data>What-if-Analysis>Data Table.) A dia log box will come up. Here you enter, as the Row Input Cell, the reference of the cell in which you would want to test the various growth rates listed in the row in your table (for example, the reference of the cell containing the growth rate assumption for 20X4, C4). In this example, we’re only creating a one-dimensional table, so leave Column Input Cell blank.

5. When you click on OK, the remainder of the table will fill in with the level of long-term debt that would be required under the different sales-growth assumptions. This allows you to see a summary of how much debt is required in different scenarios without changing the spreadsheet each time. Notice that the data table is interactive; if you change assumptions in the model, the data table adjusts accordingly.

6. You may want to add a heading and some labels to your table to remind you of what the data shows.

Question 9: What level of long-term debt would be required under the five growth rates listed above?

Part E: Create a Chart

Now create a chart to provide a more visual representation of the information in your data table. Highlight the two rows and five columns that contain the growth rates and corresponding debt levels. Then select the Chart option under the Insert menu. Now follow the steps to create the chart. In step 1, select XY scatter as the chart type and choose straight lines with markers as the subtype. In step 2, you shouldn’t have to do anything. In step 3, add a title and labels. A title would be something like “Sensitivity of required LT debt to growth rate”, the x-axis label would be “sales growth”, and the y-axis label would be “LT debt in millions”. In step 4, choose to place the table as an object in the spreadsheet. Once you’ve finished, move and size the table to an appropriate location and shape.

Once your chart is completed, notice that it is also interactive; if you change assumptions in the model, the chart adjusts accordingly.