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Master Case: AMD: The income statement: Valuation and Projections: Session V

We’ve done five of the 9 steps. We have gathered data, done an industry analysis, performed pre-analysis, read up on the management’s views of the future, and generated some assumptions. We’re almost finished so don’t stop yet. Just a few more steps, so let’s start

Projection of financial statements is done in two steps:

  1. Projecting the income statement
  2. Projecting the balance sheet

Here are the figures for Net Revenue and Cost of Sales for 1998 and 1999.

Income Statement

1998

1999

Net Revenues

2,542,141

2,857,604

Cost of Sales

1,718,703

1,964,434

Gross Profit

823,438

893,170

The Net Revenue and Cost of Sales for 1999 were $2,857,604 and $1,964,434, respectively. Our assumptions for 2000 are as follows:

Income Statement Assumptions

2000

2001

2002

2003

Net Revenue

15%

12%

9%

6%

Cost of Sales

70%

68%

66%

64%

We expect sales to grow by 15%. This means that the 2000 sales figure will be

2000 Sales = 1999 Sales * (1 + 15%) = 2,857,604 * (1.15) = $3,286,245

What would he figure be for 2001? We expect revenue to grow by 12% in 2001 from their level in 2000, which equates to

2001 Sales = 2000 * (1 + 12%) = 3,286,245 * (1.12) = $3,680,594

2002 would be computed the same way

2002 Sales = 2001 * (1 + 9%) = 3,680,594 * (1.09) = $4,011,847

You should know by now how to compute 2003 Sales

2003 Sales = 2002 * (1 + 6%) = 4,011,847 * (1.06) = $4,252,558

Charting these numbers we have projected the sales for the next four years

Income Statement Assumptions

2000

2001

2002

2003

Net Revenue

3,286,245

3,680,594

4,011,847

4,252,558

The next item on our “to do” list is computing the Cost of Sales.

2000

2001

2002

2003

Cost of Sales

70%

68%

66%

64%

Revenues or Sales are the only items that can be projected sequentially on a year-to-year basis. Everything else will be projected as a percentage of the expected sales levels. Multiplying Revenues by the Cost of Sales assumptions gives us the following numbers for each of the next four years for Cost of Sales

Income Statement Assumptions

2000

2001

2002

2003

Net Revenue

3,286,245

3,680,594

4,011,847

4,252,558

Cost of Sales- assumptions

70%

68%

66%

64%

Cost of Sales- projections

2,300,372

2,502,804

2,647,819

2,721,637

We can now arrive at the figure for Gross Profit. Gross Profit is the difference between Revenues and Cost of Sales

Projected Income Statement

2000

2001

2002

2003

Net Revenues

3,286,245

3,680,594

4,011,847

4,252,558

Cost of Sales- projections

2,300,372

2,502,804

2,647,819

2,721,637

Gross Profit

985,873

1,177,790

1,364,028

1,530,921

Operating Expenses are also calculated using the same method as the cost of sales. Simply multiply sales by the assumed percentage consumed by the specific operating expense to get the projected numbers.

20% of Sales is taken up by the Marketing, General, and Administration expense for 2000

= 3,286,245 * .20 = $657,249

Depreciation and Amortization is the only item that requires special attention. Depreciation, as mentioned earlier, is calculated as a percentage of Fixed Assets and not as a percentage of Sales. Therefore, we have left this head blank.

Projected Income Statement

2000

2001

2002

2003

Operating Expenses
Marketing, General & Administration – assumptions

20%

21%

22%

23%

Marketing, General &
Administration – projections

657,249

772,925

882,606

978,088

Research & Development – assumptions

21%

20%

19%

18%

Research & Development – projections

690,111

736,118

762,251

199,019

Depreciation & Amortization
Depreciation & Amortization

2,859,033

3,284,930

3,671,642

4,011,863

Operating Income is Gross Profit less all Operating Expenses. Operating Income is also known as Earnings before Interest & Taxes or EBIT.

Projected Income Statement

2000

2001

2002

2003

Gross Profit

985,873

1,177,790

1,364,028

1,530,921

Total Operating Expenses

4,206,393

4,793,973

5,316,499

5,188,970

Operating Income

-3,220,520

-3,616,183

-3,952,471

-3,658,049

Interest expense can be calculated using three different methods.

  1. If supplied with a business’ long-term debt figures, you can calculate the interest payment by multiplying the interest on the debt with the amount of the debt. If a business has multiple loans, add all the individual interest payments together to get the interest payment.
  1. The second method is to calculate the cost of debt and assume that it will remain constant, and multiply that by the debt outstanding to get the interest expense. Since you don’t have information about AMD’s long-term debt breakdown, this method to calculate the interest expense is recommended.
  2. For businesses that have no debt or loans and carry significant cash and short-term securities, which therefore earn interest, there is a simpler approach that links interest income to sales. Just assume that interest earned is a percentage of cash on hand.

It is time to calculate the tax AMD will pay in the next few years and the minority interest. But since we expect AMD to operate at a loss for the next few years the effective tax rate will be zero and AMD will get an income tax benefit. We will assume the effective tax benefit to around 50%.

Minority interest is also assumed to be zero.

Projected Income Statement

2000

2001

2002

2003

Income before taxes

-3,187,658

-3,579,377

-3,912,353

-3,615,524

Provision for taxes

1,593,829

1,789,689

1,956,176

1,807,762

Income before minority interest

-1,593,829

-1,789,688

-1,956,177

-1,807,762

Minority Interest

X

X

X

X

Net Income

-1,593,829

-1,789,688

-1,956,177

-1,807,762

Putting all these charts together, we get the following figures:

Projected Income Statement

2000

2001

2002

2003

Net Revenues

3,286,245

3,680,594

4,011,847

4,252,558

Cost of Sales

2,300,372

2,502,804

2,647,819

2,721,637

Gross Profit

985,873

1,177,790

1,364,028

1,530,921

Operating Expenses
Marketing, General & Administration

657,249

772,925

882,606

978,088

Research & Development

690,111

736,118

762,251

199,019

Depreciation & Amortization

2,859,033

3,284,930

3,671,642

4,011,863

Total Operating Expenses

4,206,393

4,793,973

5,316,499

5,188,970

Operating Income

-3,220,520

-3,616,183

-3,952,471

-3,658,049

Interest & Other Income

32862

36806

40118

42525

Income before taxes

-3,187,658

-3,579,377

-3,912,353

-3,615,524

Provision for taxes

1,593,829

1,789,689

1,956,176

1,807,762

Income before minority interest

-1,593,829

-1,789,688

-1,956,177

-1,807,762

Minority Interest

X

X

X

X

Net Income

-1,593,829

-1,789,688

-1,956,177

-1,807,762

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