Forecast an Income Statement, Balance Sheet, Cash Flows, Shares
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1. Forecasting an Income Statement
Abercrombie & Fitch? reports the following income statements.
Income Statement, For Fiscal Years Ended ($ thousands) 2008 2007
Net sales $3,657,847 $3,318,158
Cost of goods sold 1,238,480 1,109,152
Gross profit 2,419,367 2,209,006
Stores and distribution expense 1,386,846 1,187,071
Marketing, general and administrative expense 395,758 373,828
Other operating (income), net (11,734) (9,983)
Operating income 648,497 658,090
Interest income, net (18,808) (13,896)
Income before income taxes 667,305 671,986
Provision for income taxes 283,628 249,800
Net Income $ 383,677 $ 422,186
Forecast Abercrombie & Fitch's 2009 income statement assuming the following income statement relations. Assume no change for all other accounts not listed below. All percentages, other than sales growth and provision for income taxes, are based on percent of net sales. (Round your answers to the nearest whole number.)
Net sales growth 10.2%
Gross profit margin 66.1%
Stores and distribution expense/Net sales 37.9%
Marketing, general and administrative expense/Net sales 10.8%
Other operating (income), net/Net sales −0.3%
Provision for income taxes/Income before income taxes 42.5%
Forecasted Income Statement, For Fiscal Years Ended ($ thousands) 2008 2009
Net sales $3,657,847 $
Cost of goods sold 1,238,480
Gross profit 2,419,367
Stores and distribution expense 1,386,846
Marketing, general and administrative expense 395,758
Other operating (income), net (11,734)
Operating income 648,497
Interest income, net (18,808)
Income before income taxes 667,305
Provision for income taxes 283,628
Net Income $ 383,677
2. Analyzing, Forecasting, and Interpreting Both Income Statement and Balance Sheet
Following are the income statements and balance sheets of Best Buy Co., Inc.?
Balance Sheet ($ millions, except share amounts) March 1, 2008 March 3, 2007
Assets
Cash and cash equivalents $ 1,438 $ 1,205
Short-term investments 64 2,588
Receivables 549 548
Merchandise inventories 4,608 4,028
Other current assets 583 712
Total current assets 7,242 9,081
Property and equipment* 5,608 4,904
Less accumulated depreciation 2,302 1,966
Net property and equipment 3,306 2,938
Other assets** 2,110 1,551
Total assets $12,658 $13,570
Liabilities and shareholders' equity
Accounts payable $ 4,297 $ 3,934
Unredeemed gift card liabilities 531 496
Accrued liabilities, accrued compensation and related expenses? 1,348 1,322
Accrued income taxes 404 489
Short-term debt 156 41
Current portion of long-term debt 33 19
Total current liabilities 6,769 6,301
Long-term liabilities 838 443
Long-term debt 627 590
Minority interests 40 35
Shareholders' equity
Preferred stock, $1.00 par value: Authorized?400,000
shares; Issued and outstanding?none __ __
Common stock, $0.10 par value: Authorized?1.0 billion
shares; Issued and outstanding?410,578,000
and 480,655,000 shares, respectively 41 48
Additional paid-in capital 8 430
Retained earnings 3,833 5,507
Accumulated other comprehensive income 502 216
Total shareholders' equity 4,384 6,201
Total liabilities and shareholders' equity $12,658 $13,570
* Land, buildings, fixtures, equipment, leasehold improvements, and property under capital leases are combined.
** Goodwill, tradenames, equity and other investments, and other noncurrent assets are combined.
? Accrued liabilities and accrued compensation and related expenses are combined.
Income Statement, Fiscal Years Ended ($ millions) 2008 2007
Revenue $39,023 $35,934
Cost of goods sold 29,477 27,165
Gross profit 9,546 8,769
Selling, general and administrative expenses 7,285 6,770
Operating income 2,261 1,999
Other income* 60 130
Earnings before income tax expense 2,321 2,129
Income tax expense 805 752
Net earnings $ 1,516 $ 1,377
* Other income combines investment income, interest expense, minority interest in earnings, and equity in loss of affiliates.
(a) Forecast Best Buy's 2009 income statement and balance sheet using the following relations; assume no change for all other accounts not listed below. Assume that all capital expenditures are purchases of property and equipment, and that depreciation is included as part of selling, general and administrative expenses ($ millions). (Round your answers to the nearest whole number.)
Revenue growth 8.6%
Gross profit margin 24.5%
Selling, general and administrative expenses/Revenue 18.7%
Income tax expense/Earnings before income tax expense 34.7%
Receivables/Revenue 1.4%
Merchandise inventories/Revenue 11.8%
Accounts payable/Revenue 11.0%
Capital expenditures/Revenue 2.1%
Accrued liabilities, accrued compensation and related expenses/Revenue 3.5%
Accrued income taxes/Income tax expense 50.2%
Dividends/Net earnings 13.5%
Depreciation expense/Prior year property and equipment, gross 11.8%
Portion of long-term debt due in 2010 $16
Best Buy Forecasted Income Statement ($ millions) 2008 2009
Revenue $39,023 $
Cost of goods sold 29,477
Gross profit 9,546
Selling, general and administrative expenses 7,285
Operating income 2,261
Other income* 60
Earnings before income tax expense 2,321
Income tax expense 805
Net earnings $ 1,516 $
Best Buy Forecasted Balance Sheet ($ millions) 2008 2009
Assets
Cash and cash equivalents $ 1,438 $
Short-term investments 64
Receivables 549
Merchandise inventories 4,608
Other current assets 583
Total current assets 7,242
Property and equipment* 5,608
Less accumulated depreciation 2,302
Net property and equipment 3,306
Other assets** 2,110
Total assets $12,658 $
Liabilities and shareholders' equity
Accounts payable $ 4,297 $
Unredeemed gift card liabilities 531
Accrued liabilities, accrued compensation and related expenses 1,348
Accrued income taxes 404
Short-term debt 156
Current portion of long-term debt 33
Total current liabilities 6,769
Long-term liabilities 838
Long-term debt 627
Minority interests 40
Shareholders' equity
Common stock 41
Additional paid-in capital 8
Retained earnings 3,833
Accumulated other comprehensive income 502
Total shareholders' equity 4,384
Total liabilities and shareholders' equity $12,658 $
3. Forecasting the Statement of Cash Flows
Refer to the Best Buy Co., Inc.?, financial information shown below. Prepare a forecast of its fiscal year 2009 statement of cash flows.
Balance Sheet ($ millions, except share amounts) March 1, 2008 March 3, 2007
Assets
Cash and cash equivalents $ 1,478 $ 1,205
Short-term investments 64 2,588
Receivables 549 548
Merchandise inventories 4,708 4,028
Other current assets 583 712
Total current assets 7,382 9,081
Property and equipment* 5,644 4,904
Less accumulated depreciation 2,302 1,966
Net property and equipment 3,342 2,938
Other assets** 2,110 1,551
Total assets $12,834 $13,570
Liabilities and shareholders' equity
Accounts payable $ 4,297 $ 3,934
Unredeemed gift card liabilities 531 496
Accrued liabilities, accrued compensation and related expenses? 1,348 1,322
Accrued income taxes 404 489
Short-term debt 156 41
Current portion of long-term debt 34 19
Total current liabilities 6,770 6,301
Long-term liabilities 838 443
Long-term debt 627 590
Minority interests 40 35
Shareholders' equity
Preferred stock, $1.00 par value: Authorized?400,000
shares; Issued and outstanding?none __ __
Common stock, $0.10 par value: Authorized?1.0 billion
shares; Issued and outstanding?410,578,000
and 480,655,000 shares, respectively 41 48
Additional paid-in capital 8 430
Retained earnings 4,008 5,507
Accumulated other comprehensive income 502 216
Total shareholders' equity 4,559 6,201
Total liabilities and shareholders' equity $12,834 $13,570
* Land, buildings, fixtures, equipment, leasehold improvements, and property under capital leases are combined.
** Goodwill, tradenames, equity and other investments, and other noncurrent assets are combined.
? Accrued liabilities and accrued compensation and related expenses are combined.
Income Statement, Fiscal Years Ended ($ millions) 2008 2007
Revenue $40,163 $35,934
Cost of goods sold 30,477 27,165
Gross profit 9,686 8,769
Selling, general and administrative expenses 7,385 6,770
Operating income 2,301 1,999
Other income* 61 130
Earnings before income tax expense 2,362 2,129
Income tax expense 815 752
Net earnings $ 1,547 $ 1,377
* Other income combines investment income, interest expense, minority interest in earnings, and equity in loss of affiliates.
Revenue growth 11.8%
Gross profit margin 24.1%
Selling, general and administrative expenses/Revenue 18.4%
Income tax expense/Earnings before income tax expense 34.5%
Receivables/Revenue 1.4%
Merchandise inventories/Revenue 11.7%
Accounts payable/Revenue 10.7%
Capital expenditures/Revenue 2.0%
Accrued liabilities, accrued compensation and related expenses/Revenue 3.4%
Accrued income taxes/Income tax expense 49.6%
Dividends/Net earnings 13.5%
Depreciation expense/Prior year property and equipment, gross 11.8%
Portion of long-term debt due in 2010 $16
Best Buy Forecasted Income Statement ($ millions) 2008 2009
Revenue $40,163 $44,902
Cost of goods sold 30,477 34,081
Gross profit 9,686 10,821
Selling, general and administrative expenses 7,385 8,262
Operating income 2,301 2,559
Other income* 61 61
Earnings before income tax expense 2,362 2,620
Income tax expense 815 904
Net earnings $ 1,547 $ 1,716
Best Buy Forecasted Balance Sheet ($ millions) 2008 2009
Assets
Cash and cash equivalents $ 1,478 $ 2,802
Short-term investments 64 64
Receivables 549 629
Merchandise inventories 4,708 5,254
Other current assets 583 583
Total current assets 7,382 9,331
Property and equipment* 5,644 6,542
Less accumulated depreciation 2,302 2,962
Net property and equipment 3,342 3,580
Other assets** 2,110 2,110
Total assets $12,834 $15,020
Liabilities and shareholders' equity
Accounts payable $ 4,297 $ 4,805
Unredeemed gift card liabilities 531 531
Accrued liabilities, accrued compensation and related expenses 1,348 1,527
Accrued income taxes 404 448
Short-term debt 156 156
Current portion of long-term debt 34 16
Total current liabilities 6,770 7,483
Long-term liabilities 838 838
Long-term debt 627 611
Minority interests 40 40
Shareholders' equity
Common stock 41 41
Additional paid-in capital 8 8
Retained earnings 4,008 5,498
Accumulated other comprehensive income 502 502
Total shareholders' equity 4,559 6,089
Total liabilities and shareholders' equity $12,834 $15,020
(Round your answers to the nearest whole number.)
Best Buy Forecasted Statement of Cash Flows ($ millions) 2009
Net earnings $
Depreciation
Receivables
Merchandise inventories
Accounts payable
Accrued liabilities, accrued compensation and related expenses
Accrued income taxes
Net cash flow from operating activities
Capital expenditures
Net cash flow from investing activities
Long-term debt
Dividends
Net cash flow from financing activities
Net change in cash
Beginning cash
Ending cash $
4. Analyzing, Forecasting, and Interpreting Income Statement and Balance Sheet
Following are the income statement and balance sheet of Whole Foods Market, Inc.?
Income Statement, For Years Ended (in $ 000s) 2008 2007 2006
Sales $7,953,912 $6,591,773 $5,607,376
Cost of goods sold and occupancy costs 5,247,207 4,295,170 3,647,734
Gross profit 2,706,705 2,296,603 1,959,642
Direct store expenses 2,107,940 1,711,229 1,421,968
General and administrative expenses 270,428 217,743 181,244
Pre-opening expenses 55,554 59,319 32,058
Relocation, store closures and lease termination costs 36,545 10,861 5,363
Operating income 236,238 297,451 319,009
Interest expense (40,616) (4,208) (32)
Investment and other income 6,237 11,324 20,736
Income before income taxes 201,859 304,567 339,713
Provision for income taxes 91,995 121,827 135,885
Net income $ 109,864 $ 182,740 $ 203,828
Balance Sheet (in $000s)* 2008 2007
Assets
Cash and cash equivalents $ 30,534 $ __
Restricted cash 647 2,310
Accounts receivable 115,424 105,209
Proceeds receivable for divestiture __ 165,054
Merchandise inventories 327,452 288,112
Prepaid expenses and other current assets 69,750 40,402
Deferred income taxes 76,229 66,899
Total current assets 620,036 667,986
Property and equipment 2,894,329 2,483,350
Accumulated depreciation (997,612) (816,791)
Property and equipment, net 1,896,717 1,666,559
Goodwill and intangible assets, net 738,258 766,533
Deferred income taxes 111,002 104,877
Other assets 10,853 7,173
Total assets $3,376,866 $3,213,128
(in $000s)* 2008 2007
Liabilities and shareholders' equity
Current installments of long-term debt and capital lease obligations $ 380 $ 24,781
Accounts payable 183,134 225,728
Accrued payroll, bonus and other benefits due team members 196,233 181,290
Dividends payable __ 25,060
Other current liabilities 284,630 315,491
Total current liabilities 664,377 772,350
Long-term debt and capital lease obligations, less current installments 928,990 736,087
Deferred lease liabilities and other long-term liabilities 282,945 245,887
Total liabilities 1,876,312 1,754,324
Shareholders' equity
Common stock, no par value, 300,000 shares authorized,
140,286 and 143,787 shares issued, 140,286 and 139,240 shares
outstanding in 2008 and 2007, respectively 1,066,980 1,232,845
Common stock in treasury, at cost __ (199,961)
Accumulated other comprehensive income 448 15,722
Retained earnings 433,126 410,198
Total shareholders' equity 1,500,554 1,458,804
Total liabilities and shareholders' equity $3,376,866 $3,213,128
* Gross property and equipment and its accumulated depreciation are inserted in the balance sheet; both are taken from footnotes to financial statements. Goodwill and other intangible assets are combined, as are deferred lease liabilities and other long-term liabilities.
(a) Forecast Whole Foods Market's 2009 income statement and balance sheet using the following relations; assume no change for all other accounts not listed below ($ 000s). (Round your answers to the nearest whole number.)
Sales growth 20.7%
Gross profit margin 34.0%
Direct store expenses/Sales 26.5%
General and administrative expenses/Sales 3.4%
Pre-opening expenses/Sales 0.7%
Relocation, store closures and lease termination costs/Sales 0.5%
Depreciation/Prior year property and equipment, gross 9.8%
Amortization/Prior year goodwill and intangible assets 0.8%
Provision for income taxes/Income before income taxes 45.6%
Accounts receivable/Sales 1.5%
Merchandise inventories/Sales 4.1%
Capital expenditures/Sales 6.6%
Accounts payable/Sales 2.3%
Accrued payroll, bonus and other benefits due team members/Sales 2.47%
Dividends $109,072
Installments of long-term debt and capital lease obligations, due in 2009 and 2010 $0
Whole Foods Forecasted Income Statement (in $ 000s) 2008 2009
Sales $7,953,912 $
Cost of goods sold and occupancy costs 5,247,207
Gross profit 2,706,705
Direct store expenses 2,107,940
General and administrative expenses 270,428
Pre-opening expenses 55,554
Relocation, store closures and lease termination costs 36,545
Operating income 236,238
Interest expense (40,616)
Investment and other income 6,237
Income before income taxes 201,859
Provision for income taxes 91,995
Net income $ 109,864 $
Whole Foods Forecasted Balance Sheet (in $000s) 2008 2009
Assets
Cash and cash equivalents $ 30,534 $
Restricted cash 647
Accounts receivable 115,424
Merchandise inventories 327,452
Prepaid expenses and other current assets 69,750
Deferred income taxes 76,229
Total current assets 620,036
Property and equipment 2,894,329
Accumulated depreciation (997,612)
Property and equipment, net 1,896,717
Goodwill and intangible assets, net 738,258
Deferred income taxes 111,002
Other assets 10,853
Total assets $3,376,866 $
Liabilities and shareholders' equity
Current installments of long-term debt and capital lease obligations $ 380 $
Accounts payable 183,134
Accrued payroll, bonus and other benefits due team members 196,233
Other current liabilities 284,630
Total current liabilities 664,377
Long-term debt and capital lease obligations, less current installments 928,990
Deferred lease liabilities and other long-term liabilities 282,945
Total liabilities 1,876,312
Shareholders' equity
Common stock 1,066,980
Accumulated other comprehensive income 448
Retained earnings 433,126
Total shareholders' equity 1,500,554
Total liabilities and shareholders' equity $3,376,866 $
5. Estimating Share Value Using the DCF Model
Following are forecasts of Abercrombie & Fitch's? sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 31, 2008.
Reported
2008 Horizon Period Terminal
Period
(In millions) 2009 2010 2011 2012
Sales $3,750 $4,500 $5,400 $6,480 $7,776 $7,853
NOPAT 464 568 653 782 941 973
NOA 1,345 1,616 1,923 2,321 2,779 2,817
Answer the following requirements assuming a discount rate (WACC) of 13.3%, a terminal period growth rate of 1%, common shares outstanding of 86.2 million, and net nonoperating obligations (NNO) of $(294) million (negative NNO reflects net nonoperating assets such as investments rather than net obligations).
(a) Estimate the value of a share of Abercrombie & Fitch common stock using the discounted cash flow (DCF) model as of January 31, 2008. (Round your answer to the nearest whole number except for the discount factors, shares outstanding, and the stock price per share. Round the discount factors to five decimal places, the shares outstanding to one decimal place, and and the stock price to two decimal places.)
Reported
2008 Horizon Period Terminal
Period
(In millions) 2009 2010 2011 2012
Increase in NOA
FCFF (NOPAT - Increase in NOA)
Discount factor [1 / (1 + rw)t ]
Present value of horizon FCFF
Cum present value of horizon FCFF $
Present value of terminal FCFF
Total firm value
Less NNO (Plus negative NNO)
Firm equity value $
Shares outstanding (millions)
Stock price per share $
6. Estimating Share Value Using the ROPI Model
Following are forecasts of Abercrombie & Fitch's? sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 31, 2008. Refer to the information in the table to answer the following requirements.
Reported
2008 Horizon Period Terminal
Period
(In millions) 2009 2010 2011 2012
Sales $3,750 $4,500 $5,400 $6,480 $7,776 $7,853
NOPAT 464 555 672 795 941 986
NOA 1,315 1,614 1,930 2,336 2,773 2,798
Answer the following requirements assuming a discount rate (WACC) of 13.3%, a terminal period growth rate of 1%, common shares outstanding of 86.2 million, and net nonoperating obligations (NNO) of $(270) million (negative NNO reflects net nonoperating assets such as investments rather than net obligations).
(a) Estimate the value of a share of Abercrombie & Fitch common stock using the residual operating income (ROPI) model as of January 31, 2008. (Round your answer to the nearest whole number except for the discount factors, shares outstanding, and the stock price per share. Round the discount factors to five decimal places, the shares outstanding to one decimal place, and and the stock price to two decimal places.)
Reported
2008 Horizon Period Terminal
Period
(In millions) 2009 2010 2011 2012
ROPI (NOPAT - [NOABeg × rw])
Discount factor [1 / (1 + rw)t ]
Present value of horizon ROPI
Cum present value of horizon ROPI $
Present value of terminal ROPI
NOA
Total firm value
Less NNO (Plus negative NNO)
Firm equity value $
Shares outstanding (millions)
Stock price per share $.
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The solution provides a forecast for an income statement, balance sheet, cash flows and share value.
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