NIKE

Coccia 11

USES OF PRO FORMA STATEMENTS

Business Planning

A company uses pro forma statements in the process of business planning and control. Because pro forma statements are presented in a standardized, columnar format, management employs them to compare and contrast alternative business plans. By arranging the data for the operating and financial statements side-by-side, management analyzes the projected results of competing plans in order to decide which best serves the interests of the business.

In constructing pro forma statements, a company recognizes the uniqueness and distinct financial characteristics of each proposed plan or project. Pro forma statements allow management to:

•Identify the assumptions about the financial and operating characteristics that generate the scenarios.

•Develop the various sales and budget (revenue and expense) projections.

•Assemble the results in profit and loss projections.

•Translate these data into cash-flow projections.

•Compare the resulting balance sheets.

•Perform ratio analysis to compare projections against each other and against those of similar companies.

•Review proposed decisions in marketing, production, research and development, etc., and assess their impact on profitability and liquidity.

Simulating competing plans can be quite useful in evaluating the financial effects of the different alternatives under consideration. Based on different sets of assumptions, these plans propose various scenarios of sales, production costs, profitability, and viability. Pro forma statements for each plan provide important information about future expectations, including sales and earnings forecasts, cash flows, balance sheets, proposed capitalization, and income statements.

Management also uses this procedure in choosing among budget alternatives. Planners present sales revenues, production expenses, balance sheet and cash flow statements for competing plans with the underlying assumptions explained. Based on an analysis of these figures, management selects an annual budget. After choosing a course of action, it is common for management to examine variations within the plan.

If management considers a flexible budget most appropriate for its company, it would establish a range of possible outcomes generally categorized as normal (expected results), above normal (best case), and below normal (worst case). Management examines contingency plans for the possible outcomes at input/output levels specified within the operating range. Since these three budgets are projections appearing in a standardized, columnar format and for a specified time period, they are pro forma.

During the course of the fiscal period, management evaluates its performance by comparing actual results to the expectations of the accepted plan using a similar pro forma format. Management's appraisal consists of testing and re-testing the assumptions upon which management based its plans. In this way pro forma statements are indispensable to the control process.

Financial Modeling

Pro forma statements provide data for calculating financial ratios and for performing other mathematical calculations. Financial models built on pro forma projections contribute to the achievement of corporate goals if they:

1) test the goals of the plans; 2) furnish findings that are readily understandable; and 3) provide time, quality, and cost advantages over other methods.

Financial modeling tests the assumptions and relationships of proposed plans by studying the impact of variables in the prices of labor, materials, and overhead; cost of goods sold; cost of borrowing money; sales volume; and inventory valuation on the company in question. Computer-assisted modeling has made assumption testing more efficient. The use of powerful processors permits online, real-time decision making through immediate calculations of alternative cash flow statements, balance sheets, and income statements.

For Nike

After looking at all of the data from Nike, I have noticed quite a bit of change from year to year. I noticed that the pro forma gradually goes up each year from 2015 all the way until 2016 by 23% and then a bit lower but always increasing from 2016 to 2017. Since the pro forma represents how much the company want to grow by increasing their asses and their liabilities; it is a good thing then that each year goes up. The increasing in pro forma will allow the company to pursue more opportunities and enhance their shareholder value.

Then, I saw that If the company increase everything by 23% in 2016, all their expensive such as all the liabilities and the intangible assets will grow and so their revenue. On the other hand, if Nike decide to increase their revenue by 10% in 2017, the increase in assets and liabilities will be less compared to the previous year due to the great performance on the 2016 as in the graph (a) with a growth in both 23% for 2016 and 10% for 2017 in current assets, current liabilities and shareholders’ equity. The company decide to growth by this percentage due to the sustainable growth rate (retention rate* ROE)/ (1-Retention Rate*ROE). The retention rate is important in order to understand the growth of a company in the follow year due to the fact that is the proportion of earnings kept back in the business as retained earnings. The retention ratio refers to the percentage of net income that is retained to grow the business, rather than being paid out as dividends. It is the opposite of the payout ratio, which measures the percentage of earnings paid out to shareholders as dividends as in graph (b).

Moreover, because is all determined by the ROE, The ROE or return on equity is also very important in order to understand the performance of the firm. What is 'Return on Equity – ROE.

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder's Equity

For this reason, if we have an increase, even if it is minimum, Nike will have to invest more but the growth will be even higher. Therefore, this option is completely associate to the income of the company's shareholders'.

Graph (a)

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Graph (b)

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FORMULARY FOR AFN

· ROE: Net Income Equit

$ 3.273 / 12.707 = 26%

· RETENTION RATE: 1- Dividend payout ratio

1 - 27% = 73%

· RETURN ON ASSETS: Net Income / Assets

$ 3.273 / 21.600 = 15%

· SUSTAINABLE GROWTH RATE: ( Retantion Rate * Roe) / 1 - ( Retantion Rate * Roe)

(73% * 26%) / 1- ( 73% * 26% ) = 23%

· DIVIDEND PAYOUT RATIO: Dividends / Net Income

-899 / $ 3.273 = 27%

· CHANGE IN ASSETS: Assets ( pro forma) – Assets ( current year)

$26.562,59 - 21.600 = 4.963

· CHANGE IN CURRENT OPERATING LAIABILITIES: (( Accounts payable ( pro forma)- Accounts payable ( current year))+ (Accrued liabilities (pro forma) – (Accrued liabilities ( current year))+ (Income taxes payable (pro forma)- Income taxes payable (current year))

($2.620,60 -2.131)+( $4.858,74 - 3.951 ) + ($87,31 - 71 ) = 1.414

· CHANGE IN RETAIN EARNINGS: Net income form counting operations * Retantion rate

$4.024,97 * 73% = 2919,425

· AFN: Change in Assests - Change in Current Operating Laiabilities - Change in Retain Earnings

4.963 - 1.414 - 2919,425 = 630

Change in pro form 2016 if ROE grow by 0.5

22.5%4232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.68131868131884232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.681318681318823.0%4232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.68131868131884232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.681318681318823.5%4232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.68131868131884232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.681318681318824.0%4232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.68131868131884232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.681318681318824.5%4232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.68131868131884232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.681318681318825.0%4232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.68131868131884232.96703296703342276.92307692307713690.10989010989034765.934065934066427.472527472527532162.63736263736293308.7912087912091308.79120879120882143.956043956043972418.6813186813188