Strategic planning is critical to the growth and sustainability of any organization. An organization cannot design and implement strategic initiatives without an estimate of future profitability. Organizations acquire this insight by constructing profit projections. If a firm’s profit projection is inaccurate, it will ultimately lead to misguided decisions that may adversely impact the firm’s performance. Thus, firms must be diligent and meticulous in the construction of their profit projections.
You were recently promoted to a senior financial analyst at Capital Financial, and have been tasked with forecasting the firm’s 2018 profits. To develop the profit projection, you will apply the Percent of Sales method. The key consideration for this method is that income statement data sets will increase with sales.
Create Capital Financial’s profit projection for 2018 using the spreadsheet provided below.
- Important notes regarding the 2017 forecast information:
- Costs, excluding depreciation, were 78% of sales.
- Depreciation was 7.333% of sales in 2017.
- Capital Financial pays a 35% tax rate.
- Where “n/a” is specified, the abbreviation indicates that the percentage of sales is not applicable for that set of data.
- Capital Financial is forecasting an 18% growth in sales from 2017 to 2018.
Download and open the spreadsheet template provided above. Consider the values within the spreadsheet and the information above, then do the following:
- In the first table in the spreadsheet, calculate the following as a percentage of sales for 2017:
- EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- EBIT (Earnings Before Interest, and Taxes)
- Pretax Income
- Net Income
- In the second table in the spreadsheet calculate the following for 2018:
- Cost Except Depreciation
- Interest Expense
- Income Tax (35%)
- In the second table in the spreadsheet, forecast the following profitability metrics for 2018:
- Pretax Income
- Net Income
- Save your Microsoft Excel Spreadsheet. (Mac users, please remember to append the “.xlsx” extension to the filename.)
- The name of the file should be your first initial and last name, followed by an underscore and the name of the assignment, and an underscore and the date. An example is shown below:
In a separate Word document, address the following:
- Explain the premise for the percentage of sales method.
- Describe how an accurate profit projection supports the decision-making process within the organization.
- Save your Microsoft Word document. (Mac users, please remember to append the “.docx” extension to the filename.)
For this discussion, you will need to apply micro and macroeconomic concepts to making a major life decision that has financial and quality-of-life consequences. Consider the scenario below, then follow the instructions underneath it to complete the discussion.
The Job Offer
Imagine that a mid-sized, publicly traded organization in San Francisco, California has offered you a position as a senior financial manager. You are currently living in Kansas City, Missouri, and purchased a home a year ago.
The organization that extended the offer is willing to reimburse you for relocation costs up to $25,000. The salary outlined in the offer letter is $25,000 more than your current salary. Due to the significance of their investment, they have instituted safeguards against employee attrition. The firm has a payback clause in the new hire agreement that binds you to pay back all relocation funds if you quit or join a competitor in the next four years.
You have one week to accept the offer and, if accepted, would need to report to your new job in three weeks.
For your initial post, address the following:
- What microeconomic factors would be important to you when deciding whether or not to accept the offer?
- What macroeconomic factors would be important to you when deciding whether or not to accept the offer?
- After considering the scenario and the micro- and macroeconomic factors, would you choose to accept the offer? Explain your reasoning.