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A. Describe three ways that pro forma statements are used in financial planning.
b. Explain the steps in financial forecasting.
c. Briefly explain how to forecast financial statements using the forecasted financial statements approach. Be sure to explain how to forecast interest expenses.
d. How is it possible for an employee stock option to be valuable even if the firm’s stock price fails to meet shareholder’s expectations?
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Question 1 Describe three ways that pro forma statements are used in financial planning.
Answer:
- The first and most important use is to forecast the amount of external funding required by the firm.
- Second use is to set the appropriate targets for the profit centers or for the individual employees so that their performance can be evaluated and compensation can be fixed accordingly.
- The third use is to conduct the sensitivity analysis and evaluate what will happen to the value of the firm if there are changes in the operating plan
Question 2. Explain the steps in financial forecasting.
Answer:
- First step is to forecast the amount of sales for the year
- For the sales forecasted in first step estimate the amount of assets required
- Project the amount of funds that can be generated internally.
- Nest project the amount of funds required from the external sources
- Evaluate the effect of financial plan of the key financial ratios and stock …
