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Financial Analysis, Planning and Forecasting Theory and Application

Financial Analysis, Planning and Forecasting Theory and Application. Chapter 24. Simultaneous-Equation Models for Financial Planning. By Cheng F. Lee Rutgers University, USA John Lee Center for PBBEF Research, USA. Outline. 24.1 Introduction 24.2 Warren and Shelton model

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Financial Analysis, Planning and Forecasting Theory and Application

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  1. Financial Analysis, Planning and ForecastingTheory and Application Chapter 24 Simultaneous-Equation Models for Financial Planning By Cheng F. Lee Rutgers University, USA John Lee Center for PBBEF Research, USA

  2. Outline • 24.1 Introduction • 24.2 Warren and Shelton model • 24.3 Johnson & Johnson (JNJ) as a case study • 24.4 Francis and Rowell (FR) model • 24.5 Feltham-Ohlson model for determining equity value • 24.6 Combined forecasting method to determine equity value • 24.7 Summary

  3. 24.1 Introduction

  4. 24.2 Warren and Shelton model Table 24.1

  5. 24.2 Warren and Shelton model TABLE 24.1 The Warren and Shelton Model (Cont.) III. Financing the desired level of assets

  6. 24.2 Warren and Shelton model TABLE 24.1 The Warren and Shelton Model (Cont.)

  7. 24.2 Warren and Shelton model Table 24.2

  8. 24.2 Warren and Shelton model TABLE 24.2 List of unknowns and list of parameters provided by management (Cont.)

  9. 24.2 Warren and Shelton model TABLE 24.3 FINPLAN input format (Cont.)

  10. Balance Sheet 24.2 Warren and Shelton model TABLE 24.3 (Cont.) Historical or Base-Period input:

  11. 24.2 Warren and Shelton model TABLE 24.3 (Cont.) Historical or Base-Period input: Balance Sheet

  12. Income Statement 24.2 Warren and Shelton model TABLE 24.3 (Cont.) Historical or Base-Period input:

  13. 24.2 Warren and Shelton model Income Statement TABLE 24.3 (Cont.) Historical or Base-Period input:

  14. Statement of Cash Flows 24.2 Warren and Shelton model TABLE 24.3 (Cont.)

  15. Retained Earnings Statement 24.2 Warren and Shelton model TABLE 24.3 (Cont.)

  16. Retained Earnings Statement 24.2 Warren and Shelton model TABLE 24.3 (Cont.) The above data of financial statements is downloaded from the COMPUSTAT dataset. @NA represents data is not available.

  17. 24.3 Johnson & Johnson (JNJ) as a case study • Data sources and parameter estimations • Procedure for calculating WS model

  18. 24.3 Johnson & Johnson (JNJ) as a case study

  19. 24.3 Johnson & Johnson (JNJ) as a case study Procedure for Calculating WS Model By using the data above, we are able to calculate the unknown variables below: (1) Salest = Salest-1(1 + GCALSt) = 61897.0  0.71 = 43,946.87. (2) EBITt = REBITt-1Salest = 0.2710  43,946.87 = 11,909.60. (3) CAt = RCAt-1Salest = 0.6388  43,946.87 = 28,073.26

  20. 24.3 Johnson & Johnson (JNJ) as a case study (4) FAt = RFAt-1 Salest = 0.8909  43,946.87 = 39,152.27 (5) At = CAt + FAt = 28,073.26 + 39,152.27 = 67,225.53 (6) CLt = RCLt-1 Salest = 0.3109  43,946.87 = 13,663.08. (7) NFt = (At– CLt– PFDSKt) – (Lt-1– LRt) – St-1– Rt-1– bt{(1 – Tt)[EBITt– it-1(Lt-1– LRt)] – PFDIVt} = (67,225.53 – 13,663.08 – 0) - (8,223.0 – 219.0) – 3,120.0 – 67,248.0 – 0.5657 {(1-0.2215)(11,909.60 - 0.0671(8,223.0 – 219.0) – 0} = -29,817.99.

  21. 24.3 Johnson & Johnson (JNJ) as a case study (12) itLt = i0(L0– LRt) + ietNLt = 0.0671(8,223.0 – 219.0) + 0.0671NLt = 537.0684 + 0.0671NLt (8) NFt + bt(1-T)[iNLt + ULtNLt] = NLt + NSt -29817.99 + 0.5657(1 - 0.2215)x(0.0671NLt + 0.067NLt) = NLt + NSt -29817.99 + 0.0591NLt = NLt + NSt (a) NSt +0.9635NLt = -29,817.99 (9) Lt = Lt-1– LRt + NLt (b) Lt = 8,223.0 – 219.0 + NLt Lt– NLt = 8,004 (10) St = St-1 + NSt (c) -NSt + St = 3,120.0 (11) Rt = Rt-1 + bt{(1 – Tt)[EBITt– itLt– ULtNLt] – PFDIVt} = 67,248.0 + 0.5657{(1 - 0.2215) x [11,909.60 – itLt - 0.0671NLt]}

  22. 24.3 Johnson & Johnson (JNJ) as a case study Substitute (12) into (11) Rt = 67,248.0 + 0.5657 x {0.7785 x [11,909.60 – (537.0684 + 0.0671NLt) - 0.0671NLt]} = 67,248.0 + 5,008.4347 - 0.0591NLt (d) Rt = 72,256.435 - 0.0591NLt (13) Lt = (St + Rt)Kt Lt = 0.1625St + 0.1625Rt (e) Lt– 0.1625St– 0.1625Rt = 0 (b) – (e) = (f) 0 = (Lt– NLt– 4,326.90) – (Lt – 0.1625St – 0.1625Rt) 8,004 = 0.1625St + 0.1625Rt– NLt (f) – 0.1625(c) = (g) 7,497 – 507 = (0.1625St – 0.1625Rt– NLt ) – 0.1625(-NSt + St ) 7,497 = 0.1625NSt - NLt + 0.1625Rt

  23. 24.3 Johnson & Johnson (JNJ) as a case study (g) – 0.1625(d) = (h) 7,497 – 0.1625 x 72,256.435 = (0.1625NSt– NLt + 0.1625Rt ) – 0.1625(Rt + .0591NLt) - 4,244.67 = 0.1625NSt– 1.0096NLt (h) – 0.1625(a) = (i) 0.1625NSt– 1.0096NLt– 0.1625(NSt + 0.9409NLt ) = - 8,845.13 + 8,440.78 NLt = -600.7533/1.1625 = -516.777 Substitute NLt in (a) NSt + 0.9409(-516.777) = -29,817.99 NSt = -29,331.755

  24. 24.3 Johnson & Johnson (JNJ) as a case study Substitute NLt in (b) Lt = 8,223.0 – 219.0 – 516.777 = 7,487.223 Substitute NSt in (c) 29,331.755 + St = 3,120.0 St = -2611.755 Substitute NLt in (d) 72,256.43 = Rt + 0.0591(-516.777) Rt = 72,286.98 Substitute NLtLt in (12)… it(7,487.223) = 537.0684 + 0.0671(-516.777) it =0.0671

  25. 24.3 Johnson & Johnson (JNJ) as a case study (14) EAFCDt = (1 – Tt)(EBITt– itLt– ULtNLt)- PFDIVt = 0.7785[11,909.60 – (0.0671)(7,487.223) - 0.0671(-516.777)] = 8,907.51 (15) CMDIVt = (1 – bt)EAFCDt = 0.4343(8,907.51) = 3,868.53 (16) NUMCSt = X1 = NUMCSt-1 + NEWCSt X1 = 2754.3 + NEWCSt (17) NEWCSt = X2 = NSt / (1 – Ust) Pt X2 = - 29,331.755 / (1 - 0.1053)Pt (18) Pt = X3 = mtEPSt X3 = 14.5(EPSt)

  26. 24.3 Johnson & Johnson (JNJ) as a case study (19) EPSt = X4 = EAFCDt / NUMCSt X4 = 8,907.5075 / NUMCSt (20) DPSt = X5 = CMDIVt/ NUMCSt X5 = 3,868.53 / NUMCSt (A) = For (18) and (19) we obtain X3 = 14.5(8,907.51) / NUMCSt = 129,158.9/X1 Substitute (A) into Equation (24.17) to calculate (B) (B) = -29,331.755 / [(1-0.1053) x 129,158.9 / X1] (B) = -0.2538X1

  27. 24.3 Johnson & Johnson (JNJ) as a case study Substitute (B) into Equation (24.16) to calculate (C) (C) = X1 = 2754.3 - 0.2538X1 (C) = X1 = 2196.76 Substitute (C) into (B)… (B) = X2 = -0.2538 x 2196.76 (B) = X2 = 2196.76 From Equation (24.19) and (24.20) we obtain X4, X5 and X3 X4 = 8,907.5075 / 2196.76 = 4.0548 X5 = 3,868.53 / 2196.76 = 1.7610 X3 = 14.5(4.0548) = 58.79

  28. 24.3 Johnson & Johnson (JNJ) as a case study The results of the above calculations allow us to forecast the following information regarding JNJ in the 2010 fiscal year ($ in thousands, except for per share data): • Sales = $43,946.87 • Current Assets = $28,073.26 • Fixed Assets = $39,152.27 • Total Assets = $67,225.53 • Current Payables = $13,663.08 • Needed Funds = ($29,817.99) • Earnings Before Interest and Taxes = $11,909.60 • New Debt = $516.777 • New Stock = ($-29,331.755) • Total Debt = $7,487.223 • Common Stock = ($26,211.755) • Retained Earnings $72,286.98 • Interest Rate on Debt = 6.71% • Earnings Available for Common Dividends = $8,907.51 • Common Dividends = $3,868.53 • Number of Common Shares Outstanding = 2196.76 • New Common Shares Issued = (577.54) • Price per Share = $58.79 • Earnings per Share = $4.0548 • Dividends per Share = $1.7610

  29. 24.3 Johnson & Johnson (JNJ) as a case study

  30. 24.3 Johnson & Johnson (JNJ) as a case study

  31. 24.3 Johnson & Johnson (JNJ) as a case study

  32. 24.3 Johnson & Johnson (JNJ) as a case study

  33. 24.4 Francis and Rowell (FR) model • The FR model specification • A brief discussion of FR’s empirical results

  34. 24.4 Francis and Rowell (FR) model

  35. 24.4 Francis and Rowell (FR) model TABLE 24.9 List of variables for FR model.

  36. 24.4 Francis and Rowell (FR) model TABLE 24.9 List of variables for FR model. (Cont.)

  37. 24.4 Francis and Rowell (FR) model TABLE 24.9 List of variables for FR model. (Cont.)

  38. 24.4 Francis and Rowell (FR) model TABLE 24.9 List of variables for FR model. (Cont.)

  39. 24.4 Francis and Rowell (FR) model TABLE 24.10 List of equations for FR Model.

  40. 24.4 Francis and Rowell (FR) model TABLE 24.10 List of equations for FR Model. (Cont.)

  41. 24.4 Francis and Rowell (FR) model TABLE 24.11 Transformation of industry sales moments to company NIAT and EBIY moments

  42. 24.4 Francis and Rowell (FR) model TABLE 24.11 Transformation of industry sales moments to company NIAT and EBIY moments (Cont.)

  43. (Cont.) 24.4 Francis and Rowell (FR) model TABLE 24.11 Transformation of industry sales moments to company NIAT and EBIY moments (Cont.)

  44. (Cont.) 24.4 Francis and Rowell (FR) model TABLE 24.11 Transformation of industry sales moments to company NIAT and EBIY moments (Cont.)

  45. (Cont.) 24.4 Francis and Rowell (FR) model TABLE 24.11 Transformation of industry sales moments to company NIAT and EBIY moments (Cont.)

  46. 24.4 Francis and Rowell (FR) model TABLE 24.12 Sector interdependence

  47. 24.4 Francis and Rowell (FR) model TABLE 24.13Variable interdependence within sector seven

  48. 24.4 Francis and Rowell (FR) model

  49. 24.5 Feltham-Ohlson model for determining equity value

  50. 24.5 Feltham-Ohlson model for determining equity value Operating Assets = Total Assets – Financial Assets Operating Liabilities = Preferred Shares + Total Liabilities – Financial Liabilities Financial Assets = Cash and Cash Equivalent + Investment and Advancements + Short-Term Investments Financial Liabilities = Long-Term debt + Debt in Current Liabilities + Notes Payable Net Operating Assets = Operating Assets – Operating Liabilities Net Financial Assets = Financial Assets – Financial Liabilities

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