There are three steps to using this spreadsheet:

(1) Make assumptions about operations in the Operations worksheet.

(2) Make assumptions about financing in the Financing worksheet.
(3) Use the Solver in the Financing worksheet to minimize bank notes payable subject
to maintaining the minimum cash balance required. This step is explained in the
Financing worksheet.

The only cells that should be changed are in the Operations Assumptions and Financing
Assumptions sections. The spreadsheet will generate income statements, balance
sheets, and statements of cash flows.

Kerry Back
John M. Olin School of Business
###

Page 1
 A B C D E F G
1 OPERATIONS AND INVESTMENTS ASSUMPTIONS
2
3
4 Year 0 1 2 3 4
5
6 Sales 400 600 800 900
7 COGS (% of sales) 50% 50% 50% 50%
8 SG&A (% of sales) 30% 30% 30%
9 Income tax rate 40% 40% 40%
10
11 Inventory (% of COGS) 10% 10% 10% 10%
12 Minimum cash balance (% of sales) 4% 4% 4% 4%
13 Accounts receivable (% of sales) 12% 12% 12% 12%
14 Accounts payable (% of COGS) 8% 8% 8% 8%
15
16 Investment in PP&E 400 100 100 100
17 Depreciation - 100 100 100
18
19
20 OPERATIONS AND INVESTMENTS CALCULATIONS
21
22 Year 0 1 2 3
23
24 Average sales 200 500 700 850
25 Average COGS 100.0 250 350 425
26 Inventory 10 25 35 42.5
27 Minimum cash balance 8 20 28 34
28 Accounts receivable 0 60 84 102
29 Accounts payable 8 20 28 34
30
31 Note: There is a timing issue when comparing a balance sheet to an income statement,
32 because the balance sheet is at a point in time whereas the income statement is cumulative
33 over the preceding year. It is most natural to predict assets and liabilities based on the
34 average of the income statement items over the same (=preceding) year and the following
35 year.

Page 2
 A B C D E
1 FINANCING ASSUMPTIONS
2
3
4 Interest rate on long-term debt 11%
5 Interest rate on notes payable 9%
6
7 Year 0 1 2 3
8
9 Long-term debt outstanding 200 200 200 200
10 Bank notes payable - 28 69 62
11
12 Net new equity capital raised 300 - - -
13 Dividends paid (as positive number) - - -
14
15
16 FINANCING CALCULATIONS
17
18 Interest Expense
19
20 Year 0 1 2 3
21
22 Long-term debt 22.0 22.0 22.0
23 Bank notes payable 1.3 4.4 5.9
24 Total 23.3 26.4 27.9
25
26 Cash Balance
27
28 Year 0 1 2 3
29
30 Beginning cash balance - 98 20 28
31 Plus cash flow from ops, invests, and fin 98 (78) 8 6
32 Ending cash balance 98 20 28 34
33 Less minimum cash balance required (8) (20) (28) (34)
34 Excess cash 90.0 - - -
35
36 It is undesirable to hold excess cash when there are bank notes outstanding.
37 The cash should be used to reduce the bank loan. To do this, minimize the
38 present value of the interest expense subject to excess cash being
39 nonnegative. Click on Solver (from the Tools menu), click on Solve in the next box
40 that appears, and click on OK in the next box.
41
42 Present value of interest on bank notes 9.38

Page 3
 A B C D E F
1 INCOME STATEMENTS
2
3 Year 0 1 2 3
4
5 Sales 400 600 800
6 Less COGS (200) (300) (400)
7 Gross profit 200 300 400
8 Less SG&A expenses (120) (180) (240)
9 Less depreciation (100) (100) (100)
10 Earnings before interest and taxes (20) 20 60
11 Less interest expense (23) (26) (28)
12 Pre-tax income (43) (6) 32
13
14 Cumulative pre-tax income (NOL) (43) (50) (18)
15 Taxes - - -
16
17 Pre-tax income (43) (6) 32
18 Less taxes - - -
19 Net income (43) (6) 32
20
21 Note: Net operating losses can be carried forward or backwards. There is a limit on the
22 number of years they can be carried forward or backwards, but this is not incorporated
23 into the spreadsheet.

Page 4
 A B C D E
1 BALANCE SHEETS
2
3
4 Year 0 1 2 3
5
6 Cash 98 20 28 34
7 Inventory 10 25 35 43
8 Accounts receivable - 60 84 102
9 Total current assets 108 105 147 179
10
11 Gross property, plant & equipment 400 500 600 700
12 Less accumulated depreciation - (100) (200) (300)
13 Net property, plant & equipment 400 400 400 400
14
15 Total assets 508 505 547 579
16
17 Accounts payable 8 20 28 34
18 Bank notes payable - 28 69 62
19 Total current liabilities 8 48 97 96
20
21 Long-term debt 200 200 200 200
22 Shareholders equity 300 257 250 282
23 Total long-term debt and shareholders equity 500 457 450 482
24
25 Total liabilities 508 505 547 579

Page 5
 A B C D E
1 STATEMENTS OF CASH FLOWS
2
3
4 Year 0 1 2 3
5
6 Net income (43) (6) 32
7 Plus depreciation 100 100 100
8 Less increase in inventory (10) (15) (10) (8)
9 Less increase in accounts receivable - (60) (24) (18)
10 Plus increase in accounts payable 8 12 8 6
11 Cash flow from operations (2) (6) 68 113
12 Less investment (400) (100) (100) (100)
13 Cash flow from operations and invests (402) (106) (32) 13
14 Plus net new equity capital raised 300 - - -
15 Less dividends paid - - - -
16 Plus net new long-term debt 200 - - -
17 Plus net new bank borrowings - 28 40 (7)
18 Cash flow from ops, invests, and fin 98 (78) 8 6
19 Beginning cash balance - 98 20 28
20 Ending cash balance 98 20 28 34

Page 6