#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.