Prepare And Interpret Financial Forecasts
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CPA Business Analysis and Reporting (BAR) › Prepare And Interpret Financial Forecasts
The sustainable growth rate (SGR) measures which of the following?
The maximum growth rate achievable while maintaining the current debt-to-equity ratio and issuing no new equity, with new debt allowed to grow in proportion to retained earnings as they expand the equity base
The growth rate implied by a company's historical revenue trend over the past five years
The maximum rate at which revenue can grow without any change in profit margins
The minimum growth rate required to maintain current market share
Explanation
The SGR formula is (ROE x b) / (1 - ROE x b), where b is the earnings retention ratio. It answers: how fast can a company grow while keeping its existing financial structure intact (same D/E ratio, no new equity issuance), with debt allowed to expand proportionally as retained earnings increase equity? Growing faster than the SGR requires issuing new equity or deliberately increasing leverage beyond the current ratio. This differs from the internal growth rate, which allows no new external financing at all - no new debt and no new equity. Option A describes operating leverage effects, not the SGR. Option C describes historical trend extrapolation. Option D describes a competitive positioning metric unrelated to SGR.
A company forecasts: beginning equity $3,000,000, net income $600,000, dividends $150,000. Using average equity, what is projected ROE?
12.0%
15.5%
18.6%
20.0%
Explanation
Ending equity = $3,000,000 + $600,000 - $150,000 = $3,450,000. Average equity = ($3,000,000 + $3,450,000) / 2 = $3,225,000. ROE = $600,000 / $3,225,000 = 18.6%. Option A uses beginning equity as the denominator. Option B uses total assets as the denominator. Option C uses ending equity as the denominator.
A pro forma cash flow statement (indirect method) shows: net income $1,470,000, depreciation $320,000, increase in accounts receivable $180,000, decrease in inventory $90,000, increase in accounts payable $120,000. What is projected operating cash flow?
$1,500,000
$1,380,000
$1,820,000
$2,020,000
Explanation
OCF = Net income + Depreciation - Increase in AR + Decrease in inventory + Increase in AP = $1,470,000 + $320,000 - $180,000 + $90,000 + $120,000 = $1,820,000. Increases in current assets use cash (subtract); decreases in current assets provide cash (add). Increases in current liabilities provide cash (add). Option B omits the depreciation add-back. Option C adds rather than subtracts the AR increase. Option D omits several working capital adjustments.
A pro forma investing section shows: capital expenditures $450,000 and proceeds from equipment sale $80,000. What is net cash used in investing activities?
-$370,000
-$530,000
-$450,000
-$290,000
Explanation
Net investing cash flow = -Capex + Proceeds from asset disposal = -$450,000 + $80,000 = -$370,000. Capital expenditures are cash outflows (negative); asset sale proceeds are cash inflows (positive). Option A ignores the asset sale proceeds. Option C adds the two figures instead of netting them. Option D uses an incorrect base amount.
A pro forma financing section shows: new long-term debt $500,000, debt repaid $200,000, dividends paid $140,000, common stock issued $100,000. What is net cash from financing activities?
-$260,000
$360,000
$260,000
$160,000
Explanation
Net financing cash flow = New debt - Debt repaid - Dividends + Stock issued = $500,000 - $200,000 - $140,000 + $100,000 = $260,000. Debt issuances and equity issuances are inflows; debt repayments and dividends are outflows. Option A labels the sign incorrectly. Option B omits new debt from the calculation. Option D adds all items instead of netting inflows against outflows.
A pro forma balance sheet projects total assets of $6,200,000. Current liabilities are $850,000, long-term debt is $1,600,000, and equity (including forecasted retained earnings increase) is $3,180,000. What is the external financing needed (EFN)?
$570,000
$0 (balance sheet already balances)
$680,000
$420,000
Explanation
Total liabilities and equity before EFN = $850,000 + $1,600,000 + $3,180,000 = $5,630,000. EFN = Total assets - Total funded L&E = $6,200,000 - $5,630,000 = $570,000. The EFN is the plug figure that reconciles the asset side to the liability and equity side of the balance sheet. Option A incorrectly concludes the balance sheet already balances. Options B and C use incorrect arithmetic.
A company begins the period with a cash balance of $240,000. Pro forma operating cash flow is $1,820,000, investing cash flow is -$370,000, and financing cash flow is $260,000. What is the projected ending cash balance?
$2,320,000
$1,950,000
$2,190,000
$1,710,000
Explanation
Ending cash = Beginning cash + Operating CF + Investing CF + Financing CF = $240,000 + $1,820,000 - $370,000 + $260,000 = $1,950,000. All three sections of the cash flow statement are combined with the beginning balance to arrive at the ending cash position. Option B omits the financing cash flow. Option C adds rather than subtracts the investing outflow. Option D includes additional amounts not in the stated data.
A company forecasts COGS of $4,640,000 and targets a days payable outstanding of 50 days. What is the forecasted accounts payable balance?
$463,000
$720,000
$500,000
$635,616
Explanation
Forecasted AP = COGS x (DPO / 365) = $4,640,000 x (50/365) = $4,640,000 x 0.13699 = $635,616. Option A uses a DPO of approximately 39 days. Option C uses a DPO of approximately 57 days. Option D uses a DPO of approximately 36 days.
A company projects net income of $480,000. Beginning total assets are $4,800,000 and ending total assets are projected at $5,400,000. What is forecasted ROA using average total assets?
8.9%
9.4%
10.0%
12.5%
Explanation
Average total assets = ($4,800,000 + $5,400,000) / 2 = $5,100,000. ROA = $480,000 / $5,100,000 = 9.4%. Option A uses beginning assets only ($480,000 / $4,800,000). Option B uses a different denominator. Option D uses beginning assets ($480,000 / $3,840,000 - incorrect).
A 3-year revenue forecast shows Year 3 revenue of $6,272,000, with COGS projected at 60% of revenue. What is the projected gross profit for Year 3?
$2,000,000
$2,240,000
$2,508,800
$3,763,200
Explanation
Gross profit = Revenue x (1 - COGS ratio) = $6,272,000 x (1 - 0.60) = $6,272,000 x 0.40 = $2,508,800. Option A reports projected COGS ($6,272,000 x 0.60 = $3,763,200) rather than gross profit. Option B uses Year 2 revenue ($5,600,000 x 0.40). Option C uses Year 1 revenue ($5,000,000 x 0.40).