https://blackboard.strayer.edu/bbcswebdav/institution/FIN/534/1138/Week7/Scenario/story.html
#2 Please reply to my classmate below:
From the scenario,
cite your forecasting conclusions that support TFC’s decision to expand to the
West Coast market. Speculate as to whether or not the agency conflict discussed
in the scenario could become a roadblock to your conclusions. Provide a
rationale for your response.
Forecasting financial
statements is a process that involves multiple steps to arrive at forecasted
balance sheets, income statements, and expense and budget statements used by
management for decision making. One-year forecasts are likely to be more
accurate than five-year forecasts because more actual information is likely to
be known by management. Though, having long-term financial forecast assists
upper management in planning future building, equipment and personnel needs.
Long-term forecasts are subject to revisions when actual information becomes
known. Individual line items are forecast and then totals are brought
together. Effectively forecasting financial statements is a critical
component of a company’s predictive accounting system, which involves
forecasting the future financial performance. For example when
constructing a business forecast as a minimum the company should include the
projected revenue or sales forecast, anticipated costs, estimated assets and
liabilities, and expected cash flow.
At TFC 5 years was used
as their benchmark when working on forecasting projections and conclusions. In
each of the forecasting methods they used: operating plan, financial plan and
their sales and marketing growth. In each area, percentage of growth rate being
10%, the profit margin proved to be higher than growth rate, which is positive
for the company. Using pro forma financials, 5 years is a good benchmark
and TFC showed in the models to be turning a profit way before the 5 year mark.
The operating plan would also be fully funded and expense would only be 75% of
sales. Within the list of agency conflicts discussed, which were (1)
stockholders v. creditors (2) controlling interest owners v. non-controlling
interest owners and (3) stockholders v. managers (Brigham &Ehrhardt, 2014),
I didn’t find any to be a roadblock at all, as I believe that TFC is handling
the expansion to the West Coast in the appropriate manner and way and will make
not only the board pleased, but all of the stockholders and creditors if they
proceed with the plan that has been put together for the expansion.
#3 Respond to my classmate :
From the scenario, cite your
forecasting conclusions that support TFC´s decision to expand to the West Coast
Market. Speculate as to whether or not the agency conflict discussed in the
scenario could become a roadblock to your conclusions. Provide a rationale for
your response.
There are three keys to project in
financial statements:
– Forecasting any operating
accounts.
-Follow the firm´s policy on taking
debt, equity and paying dividends.
– The operating plans needs funds in
other to be executed. With this in mind, we can examine TFC.
TFC is a conservative company that
wants to carefully analyze and be informed of its investment decisions. As any
other publicly traded company, they have to be responsible and transparent
about investment decisions. As consultants, we need to review the company´s
financial planning to make sure the decision will maximize shareholders value.
For making forecasts, we need to review TFC´s operating and financial
plans. Forecasting cash free-cash flows and reviewing pro-forma financial
statements is fundamental to make a decision. For TFC, the forecasting revenue
shows that the assets are expected to double in size with the expansion project
within the first year. According to the accounting department, TFC´s growth
rate will be 10%. Operating expenses will dropped from 82% of sales to 75%.
Associated with these changes the pro-forma statement is expected to report a
profit margin of more than 10%., making it logical to invest in the expansion
project.
Regarding agency conflicts, we
know that the first conflict that can arise is between stockholders and
creditors (don’t want to see the company default). The second conflict can be
between controlling interest owners vs. non controlling interest owners. The
third conflict can be between stockholders and managers, creditors lend money
and managers are responsible for keeping the company growing. Potential conflict:
creditors want to get paid and managers are making decisions with company´s
assets that can affect the firm´s ability to pay obligations. In most cases,
managers interests are not aligned with projects that involve high levels of
risk, some just want to achieve their goals without going further. In TFC´s
case the expansion project will make the company assume a lot of new debt,
assuming more risk. Creditors want risk minimize, and shareholders want to
maximize their wealth. We might be before an agent conflict at TFC.
