Alan Cring Productions in association with Emergent Light Studio presents
the Illinois State Collegiate Compendium, academic lectures in business and economics.
This is business finance, FIL 341 for Autumn Semester 2024.
Today, additional funds needed.
I had built and was going to deploy this on Tuesday, but I just was not comfortable with my model at that point.
And this is an Excel spreadsheet that you will be able to download yourselves
and use as you wish for homework or just to get a better feel for this part of finance.
Now this is actually what we're going to do today, and it won't take a whole class period,
but I do want to go through it in enough detail so that you understand how this works.
First things first, this is not a complete model of how you find additional funds that you're going to need,
but it is pretty darn close.
There are a few nuances that I'll bring up along the way with this,
but it actually is in the borderline between corporate and investment.
It is corporate because you're determining, doing a forecast of how much money or capital
or combination of those you are going to need for the next period.
Now this one focuses primarily on capital funds.
I'm sorry, I kind of glitched out there.
But all you have to do is you can say not all of what we'll need will be capital.
We can also add a cash buffer or another one I'll bring up later is we can actually drain off some of our cash
to provide additional funds.
Those are possibilities as well.
But aside from that, this is just sort of the block model that I'll be doing.
But just to show you where it is and just if you want to bring it up right now so you can have it,
is go into spreadsheets, it's AFN, additional funds needed, and just download it.
Now you can tweak this.
I would kind of encourage you to, if you're going to save, save a copy instead of saving over the thing itself.
But it's AFN and we'll be using it after we look at the numbers.
And you'll see that it is daunting.
It looks daunting at first, but it is actually not hard.
And I patterned it after the one that you see in the textbook.
It's different, but it's just enough the same that you can look at the textbook to see some of the details
if it's not clear from the spreadsheets that I've built here.
But this is just sort of like the numbers all come out to be pretty clean at least at first,
and then they get a little hairy later.
But anyway, that's where we are heading right now.
But as I said, first a look at the numbers as we always do just so we can see what's going on.
Now this might not look like a spectacular day, but it is a turnaround from the bear market.
If you've got a real bear market, when we say a bear market, that's more than a day, that's more than a week.
It's an enduring thing.
We're seeing a bull day, and yeah, you can have bulls in a bear market, and you can have bears in a bull market.
But there is at least some reason to believe that we have enough of a bull day here
that it kind of broke the bear mentality on the street.
Now interestingly enough, as you can see, the Tao is still taking the brunt of the punishment of the bears right now.
And there's actually good reason for that.
Some of those blue-chip stocks, the companies are not doing all that great.
And that's not really so much the economy, as analysts say, this is these companies really not performing up to what we would expect.
The behemoths like Intel, Microsoft, even Apple are not really showing that they have what it takes to have robust growth over the foreseeable future.
However, the S&P 500, notice here that the bears did make a run.
See that dip down there?
The bears made a run around midday, and they were beaten back.
The bulls came back and just started scooping up bargains again.
So that is something that we can take cheer in if nothing else.
And the price of crude is dropping again.
That's good news because that's hopefully cheaper fuel prices down the road.
So that's always a yay.
The gold bugs are in a good mood today.
They think something bad is about to happen.
So whatever, that's the bulls and gold that are having the time of their lives and all that kind of stuff.
But anyway, now let me take you over here just for a quickie look at yields and probably seeing something grim.
Ooh, look at that.
Yields, oh, that's a pretty decent drop.
So far, five basis points today.
So we have some good news there with the yields on the bonds going down.
They're not ready to break below four obviously right now, but still they're going down.
And so we can be happy.
Excuse me.
The yields are at least peeling backward a little bit in the bond market.
And that's going to be good for the economy.
What concerns us is when the yields just keep going up, that's what gives the banks the impetus to start jacking up mortgage rates,
car loan rates, loans to corporations and all of that.
So the fact that we now have this turnaround is going to take that excitement off the banks to jack up their interest rates.
And as long as it just keeps going down, then what's most likely that will be a sign that the banks will probably not be making many loans
until consumers, businesses, and the banks know where this is all going to end up.
Are we going to finally start seeing a slide in interest rates again?
Probably, but we've got to wait for everyone to think that's what's going on.
Now, interestingly, the Nikkei, even when it's having a bull day, it's not anything to write home about.
What I hear is Tokyo is in something of a recession.
And Japan's central bank has talked about lowering their interest rates, trying to get interest rates down to stimulate the economy.
So far, it hasn't really juiced their economy much.
So Japan is in kind of a funk, and that's what you're seeing here in the Nikkei 225, just that overall malaise in the Japanese economy.
And of course, London, it went up and then it just slid right back down.
They're about to close out the day, and they'll be lucky if they stay above water before they bell over there in London.
So there's that.
But like I said, the good news is that we do have some strength.
And if you just look at some of the ones that we usually look at, banks, that's interesting.
BAC should be down, but I can't swear to that, really.
BAC should be down.
Oh, look at that.
Well, barely up.
It's really kind of a dead day on the street.
Something like, let's look at Koliapalmov.
What's the other one?
Oh, I wanted to look at retail grocers.
There is a shakeup happening rather noticeably in the retail grocery market.
Several old grocery chains you might not have heard of because they are regionals in the South and in the West, but they're buckling.
And it's a little bit troubling now that these old, fairly well diversified, regionally diversified stores are beginning to slip away.
And Kroger is one of them.
But Kroger is not going to go away, but it is taking some pretty big grief right now.
It's underpriced according to this, according to the P-E ratio, it's underpriced.
But looking on another one, and we're talking about retail grocers here, wait.
No, that's not what I wanted.
Why did I do that, Walmart?
Even Walmart's in kind of a malaise right now, but a lot of it's just this is not a good time.
What we're hoping for is that these numbers are going to start looking better in the Christmas season than they do now.
Target has been showing not very much.
Oh, look at that. Today, Target actually came up a little bit.
So there's some good news there, but you have other sectors that just don't seem to want to do much right now.
So anyway, the bottom line is that this is kind of a difficult market.
Now, before I go to the topic today, do you all know what I mean by a short sale, by short selling?
Have you ever heard? Some of you are nodding your heads.
Well, let me get a poll of this.
Do you know how to do a short sale?
Okay, I'm going to show you, but I want to make sure I'm not telling everyone something you already know.
Have you ever done a short sale, madam?
Can I say that you have? Okay.
Okay, now most people and I, this is getting you out of the textbook for just a few minutes
and getting you some extra knowledge that makes my FIL 341 a little richer than the typical one.
But here's the thing.
There is a common sentiment, even among investors, especially nonprofessional investors,
that you make money when stocks go up, you lose money when stocks go down.
Actually, you can make money either way.
And I'm not talking about options, call and put options.
I'm talking about just stocks themselves.
Obviously, if you buy a stock and the stock goes up in price, you get a capital gain and you get a dividend.
Oh, everything's looking good.
That's what most people think.
And if stocks go down, boo-hiss, there goes my pension fund,
or there goes my little investment I was making so I could put a down payment on a car and all that.
But in fact, there is the other side of the market.
You can go long or you can go short.
Long means buy, short means kind of like a sell.
I caution you that this is going to be a very simplified example of it.
And I also caution you that in order to participate in short sales, you must have a margin account.
In other words, your brokerage account has to have a certain amount of money in it in case something nasty happens.
Because the worst that can happen when you buy is that you lose your investment.
The worst that can happen if you short sell is that your ask can be reclaimed by the great ether.
And again, this is going to be a very simplified example of it.
And I will dispense with a couple.
I'll mention them and then I'll step away from them.
But here's how it works.
Let's take DRL, common stock, currently at $35 a share.
Now you think that that stock is going to fall.
You say, yeah, it's going to go up there, sky's the limit.
But you think it's going to drop.
And let's say that you have what we might call a cover trigger, a cover point of $30 a share.
In other words, if it gets that low, well, by God, I've made my money and I'm getting out before it turns around the other way.
In other words, you need to have a point in mind where enough is enough.
I'm getting out of this.
And there's a good reason for it, too.
The first thing, you think that it's going to fall to $30 a share.
So what you do is you borrow 100 shares DRL.
First thing you do is borrow.
Now you're saying, who do I borrow from?
You don't.
It's just out there.
There is not someone that you borrow it from.
There's not some institution you borrow it from.
You just borrow 100 shares because there's a vast ocean of shares out there.
And you're just borrowing 100 of DRL.
You go and your broker will take care of that for you.
And then you immediately sell those 100 shares DRL at the price of $35.
Now that will net you $3,500.
You say, wait a minute, how does this work?
Well, first of all, when you borrow those shares, every day that you hold those,
you have that open borrowed position, you are going to pay interest on it, on that position.
So remember that the longer that you keep those borrowed shares out there in the short position,
the more that accumulates that cost of the position.
And I'm going to ignore it for this, but keep in mind that that is a real motivation to cover soon.
So let's say now that DRL actually does fall to $30 a share.
So what you do is you buy 100 shares of DRL at $30 a share.
So that means that you are out now 30 times 100 or out $3,000.
You buy those and you pay back those to where that you borrowed.
In other words, you're covering your position.
You finished up, game over, that's the end of the story.
And so without talking about fees or that interest that you were accumulating,
how many days it took you to get it down there, you waited.
You're up $500.
That's how you make money on stock price falls.
That's a short.
Okay, first things first.
Keep in mind, again, I'm going to emphasize this enough,
is that there is that interest payment per day that you're going to be accumulating on that position.
So you're going to want to cover as soon as you can.
Now also notice that if DRL goes up, you're screwed because you will eventually panic
and you will cover at 37, 38 just to get the hell out.
Because if the stock price goes up, you're going to have to buy back at a higher price.
And so you're going to wipe out that $3,500.
If it goes to 38, well, then you say, okay, that's it.
That's it. I got to get out because it's going up and it's not going to go back down.
So at that point, you cover at 38.
And so you lose $300 plus you probably waited a few days, three, four, five days.
And so you were accumulating that interest cost, hoping to God that it turned around and went down.
Okay, now a couple of pieces of terminology.
And of course, they don't keep the bookmarks they think I really want in this.
So I'll have to go and get it again.
Now there are a couple of different places you can look at short positions.
NASDAQ has one.
And I hate it because theirs has a little more information, but it's really old information.
It's like last time I checked it was like at the end of September, what was going on then.
But I've never looked at this thin tail.
I don't know.
See, there's some information that I'm hoping for.
Oh, stop it. Of course, I'm a human, you toad.
That's not going to help me. That's a little too confusing there.
Let me go back here.
Okay, I'll just go the NASDAQ tracker.
I hate this one because it's just so lame.
But there are a couple of things.
The first thing is the short interest outstanding or short interest.
How many shares of the company are out there in a short position?
So let's look at say Tesla.
And I hate how late how how.
Oh, that's right.
Click that.
This will show you up.
See, NASDAQ for all that they used to be, they are so behind now.
But this is how many shares on September 30th.
How many shares of Tesla were in a short position?
The bigger, the more bearish the sentiment is behind the scenes.
Keep in mind that a stock as it's going up, usually you'll see the short interest going up too.
Because there will be this belief that it will top out and turn back over.
So you'll have shorters coming in to take their positions betting on the turnaround going down.
So Tesla, as you can see, that's a hell of a lot of shares.
And that's one company.
Think of all the hundreds of thousands of companies out there, public companies.
That's just one.
So the aggregate short interest is something that's kind of interesting to us.
Because as that short interest grows overall for all companies,
that says that there's market sentiment that is thinking there's a lot of market sentiment that's thinking that it's going to have.
There's going to be a pretty big drop in price of us of overall the stock markets.
So that's an important thing here.
Now, one thing that I hate on these is they don't show you another one that's important.
And I'll put this in parentheses because almost no one says that.
The short float.
That's the percentage of the company's stock that is in short position.
And they don't report it for Tesla.
So if Tesla had a billion shares, then its float would be 7.4%.
The short float is important to the extent that it can get ridiculous.
I've seen the float get to 70%, 80% was in short.
Now, in other words, that many shorters on that stock were out there.
That percentage of the shareholders of the corporation were betting against the stock.
Possibly.
That's a scary number.
Now, here's the bad part.
Now, this is how it can turn really nasty.
Suppose that the stock price keeps going up and up,
and you see more and more shorters coming in thinking, yeah, it's going to peak, going to peak.
And the float gets bigger and bigger, and it doesn't.
Well, you've got all these people who are holding cover.
See on Tesla here, one day to cover.
In other words, right now, it's taking only one day for the shorts to say, I'm covering.
That's a sign that the stock price is going down.
They're covering, and they're out.
They've made some money, and they leave after a day in this position.
That's decent.
If it gets to be five, seven, ten days to cover, that is a sign that something is, that they're going to get killed.
Because you see, after a certain amount of time, you get a mass freakout effect.
Because let's say that you've got 70% of the float, and the stock keeps going up and up.
And all these people are sitting there, paying interest every day, waiting for it to go down.
Well, some son of a bitch is going to say, all right, I'm out.
And all it takes is a few of them all at once to say, I'm out.
And they cover.
And then, okay, look at the place where you cover.
You have to buy the stock to cover.
So if you suddenly start having a few shorters covering themselves, that pushes the price up.
The other shorters say, oh shit, it's going up.
And they start getting out.
And then you have a herd, essentially something that qualifies as the hordes of Genghis Khan, all buying at once to cover.
And all of them buying at once is going to drive the price through the roof.
And you've got a whole lot of shorters who are very, very sad because they are covering at way above the price that they sold it at.
They've got to buy it.
And when they buy it, every buy pushes the price up.
And if a whole bunch of those son of a dogs buy it, they're going to drive the price through the roof.
And then everyone is destroyed in the process as that happens.
That's how a short position.
That's the dark side of a short.
Now, I'm sure you've never heard of this stock.
It's this lousy little company called GameStop.
Yeah, you have heard of it, haven't you?
GameStop was a favorite whipping boy of a couple of disreputable SOBs on the street.
They would short GameStop every couple of weeks.
They'd just take these big positions in GameStop because they just knew the stock price was going to go down.
And so it was like guaranteed money.
And they would oftentimes, the rumor was, that they would help it go down by passing out another nasty rumor about GameStop.
Oh, man, I hear it's almost about to go to bankruptcy.
Oh, God.
Yeah, it's unbelievable how bad it is.
Of course, that would drive the price down and they would cover their shorts and make themselves a couple of hundred, five hundred thousand dollars, a million dollars.
Then this terrible thing happened.
This place, this cesspool on the Internet called Reddit, and I am on Reddit, there was a subreddit called Wall Street Bets where they were saying, you should buy this stock.
And there was an analyst who was making note of something ancient that from my time, a ratio that wasn't being paid attention to.
And she, 26 years old, she was really bright.
I've begun to follow her recommendations a little bit, or at least follow her blog.
She said, GameStop is not going to go bankrupt.
GameStop, if it gets a good management team in there, it is, the sky is the limit.
And so, put those two forces together and suddenly all of these Redditors and their mothers and their cousins started buying GameStop, drove it sky high.
And these Wall Street boys were just sitting there.
They weren't even paying attention.
And before they knew it, they were covering at a loss of several million dollars.
It was spectacular.
Especially because after the blood had flowed, these Wall Street boys were demanding that Congress pass legislation that they can't talk about stocks on Reddit.
And they said, gee, weren't you the free marketers?
And now you want government to regulate these scoundrels?
But anyway, yeah, it can turn, sometimes when it turns nasty, it turns nasty on the people who were making their coin, just driving stock prices down so that they could profit on the cover on short positions they were taking.
So there's that.
That is a short sale.
That's enough about short.
But first things first, and that's why I hate this, because they don't show the float.
And the second thing about it is, well, that's the big thing that I don't like is what percent of the stock is in that position.
But 1% or rather like that, a 1 is a decent one.
Let me try this.
Ford.
What?
Okay, fine.
We'll do GM.
Search.
Oh, for heaven's sake, Nasdaq, come on.
Let's get real.
Whoops, I meant to.
Let me see if I can find another service that's better.
Short tracker.
That's UK.
I don't want to do that.
FINRA.
I wonder if FINRA has anything better.
Loading.
Oh.
They're not reporting it either.
This is kind of depressing.
And look at that.
They're not reporting any better than Nasdaq was.
Oh, well, you got the idea.
So if you want to walk on the wild side, you can make money on short positions.
But remember, this is a one-night stand.
Don't get married to a position hoping that it will improve.
It's sort of like you get into a relationship and your significant partner turns into a werewolf.
Okay, well, I'm just going to wait this out.
Tomorrow, my partner will be nice and loving and normal again.
But every night, I'm going to eat your loins and soul.
Get out.
Don't hold shorts too long.
And make sure that you have, to a certain extent, see that one right there?
That is not a tight trigger.
That's a nasty trigger.
A trigger, I mean, you're going to do fine if you have triggers of a couple of dollars a share.
Just make sure, don't have, unless you're absolutely sure that the stock is going to go to hell,
make it a trigger like 33, 32.
You won't make as much money, but at least it's got a better chance of going to 33 or 32 than it does of going clear down to 30.
Just the last piece of advice.
Now, AFN, additional funds needed.
And I've made this spreadsheet for you folks to have and to use.
And this is a pretty trivial example, but you can put real numbers in there.
And this is more or less how it's done.
You can put some complications in.
The first thing that you're going to want to do is get a nice income statement and some additional information,
the dividends and additional retained earnings, addition to retained earnings,
how many shares are outstanding, all that good stuff, and a few ratios.
And a tax rate for your troubles.
Once you have gotten all of that into place, and also you'll have a balance sheet too that will give some of the same information.
Now, you notice something that I do here.
I have common size.
In other words, these percentages are the percentages of sales.
And then on the balance sheet, these are the percentages of total assets.
These are just common size.
Now, the purpose of the common size is a starting point.
You can use these percentages for the next year's forecast.
You forecast revenues, and then all of the numbers come out of the revenues as percentages.
So in other words, if this goes up to 80,000, then everything would be the same percentage of 80,000.
You don't have to do it this way, though.
You can actually alter these percentages.
You can say, well, that SG&A sucks.
As you can see, it does here.
That's 90%.
Yeah, that's a terrible SG&A.
So you might declare 80% next year is the target for that.
80% of sales, not 90%, 80% of sales.
And that will trickle down here to a higher net income, you hope, net operating income pre-tax, and then at the end your net income.
You can target these.
You can put in another one.
You could also say, let's see, let's make all of these industry standards.
In other words, let's see what the industry is for all of these percentages.
Easy to do.
You go to Standard Board of Global Net Advantage, and they'll tell you percentages compared to the industry.
Nothing hard about this part.
Now I'm going to keep pushing you here a little bit.
And you can put in a tax rate.
Now technically it should be 21% right now.
I just used 25% there.
But now again, the balance sheet, the same thing.
You can forecast next year's by taking the percentages off the total assets for next year.
Or you can set new targets.
In this case, you notice there are a couple of things that I'm looking at here, deficiencies that concern me somewhat about this.
My assets here, well, I shouldn't say.
Cash is a little bit on the thin side.
It looks like they have some illiquidity here.
But we're not going to criticize them now, for now.
But now over here, one thing I want to point out, and again, you can use next year's total assets with this year's, the current percentages,
and get all of these numbers.
So whatever that new total assets you want to set it at, you just take 25.35% of it, and you get your accounts payable and all that, all the way down the line.
This has a name that is more common.
You may not have heard this name before, but if you take my 340 class, you will hear it.
It's called spontaneous liabilities, or spontaneous short-term liabilities.
Another term for it is spontaneous financing, because this is money that other companies or your workers or whatever are giving you.
You're not paying them, so they're financing your operations.
So the term that we use in cash management is this is spontaneous financing.
I think your book uses the term spontaneous liabilities or spontaneous current liabilities, something like that.
But it is actually part of your financing package.
And as I told you, this is actually, you want this to be good.
You want to put off paying your bills, and you want to accelerate collecting your accounts receivable.
Those decrease your cash conversion cycle.
Now, obviously, you're going to piss off your suppliers if you don't pay them.
But as a matter of fact, if you look at a company like Walmart, its accounts payable and accruables, its spontaneous financing,
is so huge that literally its suppliers finance all of its short-term operations.
Literally. Walmart suppliers finance all of Walmart and some extra into long-term assets.
It's that severe.
And that puts Walmart in the category of geniuses who are assholes.
It's a special category.
But anyway, okay, so now I'm going to take you through just some ratios that we care about. Operating costs over sales.
These are ratios that you have seen some of these, but these are more specialized for calculating.
They have more meaning, and some of them you wouldn't see typically in a usual find the ratio of,
no, these are more things that we need to do if we're going to forecast financial need.
And operating costs over sales.
Now look at this one. This one is bloody for this company. It is awful.
A healthy number, it depends on the industry.
But I get a little bit overly excited if I see that above 60%.
This company is essentially, almost all of its sales revenue is being absorbed by operating costs.
And that's just a terrible situation.
Now depreciation over fixed assets.
And this is accumulated depreciation.
Well, no, this is current depreciation over your fixed assets.
How much are you shaving off this year, but in general, how much are you shaving off your fixed asset value, book value, through depreciation?
You don't certainly want that to get too high, because what that means is that you don't have a whole lot of fixed assets, a book value left.
And what you have left, you're depreciating the hell out of it.
You're driving toward a book value of zero on your assets.
So you don't want this to be a very high number.
Now in this case, I did not, and I apologize for that.
These black numbers, those are the industry averages. Those are industry averages in here.
So you can see that actually, this is a high operating cost industry.
But even at that, this company has even higher operating costs than the typical company does as a percent of sales.
And cash over sales, this is apparently an industry that is illiquid.
They maintain very tight cash balances, or liquid balances, I should say.
Now the receivables and the percent of sales, that is a little higher than the industry.
Remember that your receivables is revenue that you have recognized and that you have paid taxes on, but you have not gotten that money.
Right now, I'm driving into the end of the year, and my receivables, I'll just tell you the number I'm projecting now,
but I'm seeing total sales of about $18,000. My receivables are disgraceful 12% of that.
I'm sorry, $12,000. I've got out there. I'm paying taxes on the 18 grand,
but I have got only about six grand in my pocket to pay those taxes.
The rest, God knows when those scoundrels are going to pay me.
Okay, inventory over sales. This is fairly close to the industry average.
Remember that inventory allows you to be able to deliver to the customer as fast, very quickly.
We've got it in the warehouse, we'll get it to you.
The downside is that the more inventory you have, the more you pay for it.
Warehouse space, security, lighting, heating, insurance is a big thing these days for inventory,
and it gets pretty bad because a lot of insurance companies are, they'll say,
well, yeah, we have standard policies and premiums for this, this, and this, but this is unusual.
We'll have to put you into an excess line, and that'll be a very expensive premium.
So that insurance can begin to bite you in the butt on this.
Fixed assets to sales, well, they certainly, the over sales,
they certainly have a lot of fixed assets compared to sales relative to the industry.
They are overburdened to a certain extent with fixed assets compared to their sales.
In other words, their fixed assets are not generating sales as much as is typical in the industry.
So then we would go down to the accounts payable, another was spontaneous financing as a percent of sales.
Theirs is high, and these are actually kind of made up numbers, but that's a little bit difficult.
Okay, the equity multiplier.
Basically, all this is doing is telling you how many times over your company
it has magnified your base of what you've got from those investors, those equity investors.
Then over total assets, you notice here this is a highly leveraged company compared to its industry.
They borrow a lot compared to their industry.
If their sales are not good, that would explain it.
They're using a lot of their, they're using a lot of money, borrowed money to cover all the assets they've built.
Total liabilities over total assets.
This is a company that is, if you look at the TL over TA, above 50%, this is a highly leveraged company.
That means it's a very risky company.
And this times interest earned, that is a consequence, that's a low number.
They can cover their interest with the money available for them to cover it only three and a three quarters times over.
That is a consequence of all of their debt.
They're borrowing a lot of money.
So these common sizes are doing a lot to help us.
ROA sucks.
This is because they have their return on assets.
Their fixed assets are huge.
See this over here?
That's what's driving that ROA down.
Remember, ROA is net income over fixed assets.
Going to sales over assets, you can clearly see, as I had said before, that those fixed assets are not generating a whole lot in sales.
They're not generating as much as the industry average.
Now the price earnings ratio, this is indicating to us that the price, the market just does not like this stock.
They've got an earning, they've got earnings, no question about it, but the market is not impressed by those earnings.
Operating profit ratio, obviously lower because of all those SG&A expenses.
The capital ratio is high because they've got so many fixed assets.
And the return on invested capital, well, they're not making enough money for all that money that was put into the company.
And the book has these formulas, and you can certainly see them when you go over here to the spreadsheet.
You can see how I construct them in the spreadsheet.
But now, here we go.
The pro forma, the pro forma income statement, I brought the numbers, the percentages over from 19, from 2023, and I just plopped them right there.
And then I just took their projected sales and then took these percentages onto the new projected sales.
In other words, these are the same ratios that they had last year, percentages.
Now, you can change those. Well, we don't want 90%. We want 80%, by God, things like that.
You can change those ratios.
But I'm just starting you out with the ones from last year to create just a basic set of pro forma income statements and balance sheets.
And a few other numbers around here that we're going to just toss in.
You could put about anything you want in here as long as you're being realistic.
So it's just one of those things. You can do what you want.
Now, here, this is a number that drives this one.
We're going to say that the company is going to increase its sales by 10% in 2024.
You can make that number whatever you want. You can make it smaller. You can make it larger.
Remember that the smaller you make it, the more you're continuing the suck that was their income statements from last year and balance sheet from last year.
The higher you make it, ultimately, that's going to increase the AFN, the additional funds needed by the company.
And then, of course, with a company that's already in so much debt and their price is so low,
that's not a very happy situation. They're already leverage 53%, 54%.
Their price is already in the toilet from the P-E ratio. So they don't have a whole lot of room to grow.
They're boxing themselves in a bad way. Now, the balance sheet, my ass, what did I do there?
I don't know why that balance sheet turned nasty. I may have to fix it before you want to download it.
Okay, now, these are the numbers. AFN is just a formula, additional funds needed.
And there is the formula right there. And all you need are the growth and sales.
Well, we've said 10% by reference. The sales last year, well, we got those. We just do that one by reference.
The assets last year, we've got those, the total assets. Now, here's where I bring in that term spontaneous liabilities.
The spontaneous liabilities, that was the accounts payable plus accruals, and that's that number right there.
Now, here is where I forecast that number is the sales, forecast sales.
And then increase in the sales is 7,200. That number doesn't look right. I should have, did I do that right?
Pro forma, actually, I could just do that as, let me do this.
Equals sales last year times 1 plus 0.10, close those parentheses.
There we go. Increase in sales, 7,200 dollars.
So, the profit margin, it will just fall out on its own. All that is net income divided by sales.
And then you do a couple of ratios, assets over sales. And you do your payout ratio.
Now, in this case, the payout ratio is 1 minus the dividend ratio.
The dividend ratio is how much they paid in dividends over here, how much they paid in dividends divided by the earnings net income.
So, that's the dividend ratio, and the payout ratio is 1 minus that.
And so, we come out with the payout ratio, and we get spontaneous liabilities divided by sales.
We're going to need that. Now, let me explain the formula to you fairly briefly.
Now, you're going to take the assets to sales, and then you're going to multiply that times the change in the sales.
And then you're going to take out your spontaneous liabilities divided by your sales, times the change in sales.
And then you're going to take the profit margin times 1 minus the payout ratio.
So, in other words, this is the money that the company gets to keep.
The profit margin, the amount of money that the company gets to keep, times 1 minus what they pay out in dividends.
And this is their additional financing needed, 1,909 dollars and 4 cents.
Now, the one thing that you would want to ask yourself is where are they going to do that?
Where are they going to get that money? If they get it from debt, we look at the formula.
Well, I don't know why that's cracked up like that.
It wasn't a few minutes ago. SB8 over B8. Oh, B8 equals, I can fix that easily enough,
the balance sheet times 1 plus, I apologize for that, I don't know, 10%. I could do that more elegantly.
Oh, balance sheet, let me do that again.
Equals the balance sheet, this was the pro forma balance sheet.
Where's my pro forma balance sheet? Where the hell did my pro forma balance sheet go?
Ha! You aren't going to do this because somehow my pro forma balance sheet has disappeared.
That's why that isn't feeding in properly. I'll fix that before this is over though.
Let me do something here. That is the pro forma balance sheet.
Equals the balance sheet from 2003, total assets, times, open parentheses, 1 plus 0.10, close the parentheses.
There we go. That was rude. Yeah, okay. So there we go.
I don't know why that did that. I'll have to re-upload that.
But anyway, there you go. So the bottom line though is, they have got a lot of debt already sitting in their portfolio.
And if they finance that 1, 9, let me do that real quick here. I'm just going to do a quick scratch calculation here of the AFN.
I'm going to take, this would be, AFN over debt.
And let me see what that is. That would equal additional financing required divided by what they've got in debt right now.
Right here. And that's a percentage for heaven's sakes. Okay, percent.
They would have to increase their debt leverage 12% to finance their additional financing needs with debt.
That would be, that's a lot of increase. They're going to pay a very high interest rate to leverage themselves out that far.
But again, the price of the stock is sucking right now. So we could even look at AFN over equity.
Equity. Oops, I mean slash equity.
And take that over here and say this number divided by their projected equity next year, total common equity.
It looks to me like if I were a betting kind of person, they probably, it's better if they use equity at this point.
Because that additional financing needed would increase their equity contribution, capital only 7.3%.
And if you use debt to do it, that increases your debt percentage by 12, more than 12%.
So the bottom line here is that it looks as if even though the stock price sucks based upon that price earnings ratio,
selling stock is probably going to be the best way that they can do what they need to, get what they need to accomplish.
So that, and let me save that. That is how you do an additional financing required calculation.
Now there are a few homework problems that you can use this into.
And I would recommend you go through, get comfortable with the model, and then use that.
And then I will add some more meat to this in the next couple of lectures saying, okay, what if we do it this way or that way?
There are a couple of other ways we can get out of this trap that this company is in.
But none of them are going to be quite very desirable.
But anyway, that's all I have for you right now. I thank you.