APA, One Page Paper and Two P&L's (Not Including The Title, Spreadsheets, And Reference Pages). The Description Is Below:ONE-

Interest expense will need to be watched closely due to it rising to almost $560M by the end of 2019. The company will need to relook at the strategic plan to sustain profits enough to cover expenses in the near future years. Net Income will continue to be low compared to net sales. They will slowly increase to $ 9,945M by 2019.

This growth is consistent with the company’s priorities of accelerating comparable store sales, accelerating the power of the digital platform, growing market share in China, and gaining market share of at-home coffee (ABC firm, 2017a). While 10% annual growth is excellent, it is also very reasonable and achievable for ABC firm. The company posted a growth rate of 11.24% from FY15 to FY16 and can surely repeat those performance metrics as it continues to grow globally and refine its operations domestically.

Best Case Scenario

ABC firm’ likely case scenario is built around 10% revenue growth projections combined with steady cost and tax ratios. The company’s best-case scenario is built around a higher growth rate of 13% combined with a reduction in cost ratios. Having already achieved market dominance in the domestic arena through a growth-model, it is possible the company could focus its efforts on an efficiency-model and reduce costs. With that change of focus the company could reduce its operating costs by a few percentage points. If that happens concurrently with a better-than-expected product roll-out into the China market, the company would witness its best-case scenario.

In this scenario, the company would see a high operating income rate of 22% of total net revenue. Additionally, the company would own an unprecedented net earnings rate of 16.8% of total net revenue. These best-case scenario figures equate to net earnings of 4242.4M for year+1, 4793.8 and 5417 for year+2 and year+3 respectively. Due to the company’s efforts to increase operational efficiency, operating costs would shrink equaling 80% of total net revenue. This is a decrease of approximately 3% from the last three-year average. All told, the company’s net earnings would nearly double from 2884.7M in FY17 to 5417M in year+3 in this best-case scenario.

Worst Case Scenario

The company’s worst-case scenario is effectively the opposite of its best-case scenario. Here, the company’s China roll-out severely underperforms. The poorly planned and executed strategy not only doesn’t see the returns anticipated, but it actually increases operational costs. Additionally, the company invested so much manpower and marketing effort on its China/Asia Pacific segment that the domestic segment and other international segments were ignored and witnessed losses. This combination of lower-than-anticipated profits and increased costs has a massive impact on the company’s bottom line.

In this scenario the company’s poor performance achieves only a 4% growth rate in total net revenue. Conversely, operating cost rates increase from approximately 83% of total net revenue annually to 86% annually. These changes decrease the delta between net revenue and operating costs and in turn lower the company’s net earnings. In year+1 the company sees only 2509M in net earnings, a drop from the 2884.7M achieved in FY17. By year+3 the company’s net takeaway is only 2712M, still less than what the company earned in FY15. The bottom line of this worst-case scenario leaves the company spending nearly 90% of its annual revenue on operating expenses and taxes, pocketing just 10.8% as net earnings.

Discussion

These projections were all impacted by assumptions, forecasting methodology, and information gaps. The assumptions varied slightly for each scenario, however, they were based off of ABC firm known operational priorities to increase revenue through a growth-model. ABC firm’ priorities are to expand in China, in the digital environment, and in the at-home coffee subindustry. All scenarios were based on this plan of action but modified to account for successful or unsuccessful execution of the strategy.

The best-case scenario relied on assumptions of outstanding growth-model profits in China combined with increased efficiency-model cost savings internationally. The worst-case scenario was based on an unsuccessful product roll-out in China that reverberated negatively throughout the business. The likely case scenario was based on the company’s FY18 financial projections of approximately 10% annual interest growth.

The forecasting methodology was the same for all scenarios. As a starting point, the last three years of financial data was analyzed through horizontal and vertical analysis. Vertical analysis (VA) proved to be a more consistent factor of company performance. Therefore, VA ratios were used to generate forecasts. However, before the VA ratios could be applied an annual rate of revenue growth had to be predicted. Once the annual growth rates were generated from the aforementioned assumptions, the VA ratios were applied. From there the forecasts were created and projections were made.

All scenarios shared the same information gaps. These included future company performance, China market roll-out execution, tax considerations, and investee activity. Therefore, several factors such as income from equity and interest expense were held standard across all three scenarios. These projections are appropriate because they use reasonable figures based off the company’s actual operational priorities. Additionally, the company efforts detailed above are consistent with the ABC firm’ mission and corporate intent (ABC firm, 2017b). Lastly, the best case and likely case scenarios relied on aggressive but achievable growth projections.

The above assumptions played a foundational role in deriving ABC firm’ projections. Any changes to the assumptions would have a tremendous impact on the projections. As an example, if ABC firm’ operational priority was to refine the domestic market and reduce its presence in the China market, the assumptions for projection generation would change significantly. In turn, the projections would change to an equally severe degree. However, the methodology would remain the same and would be applied to less aggressive projected growth rates.

References

ABC firm Fiscal 2017 Annual Report. (2017a)

ABC firm Fiscal 2017 Letter to Shareholders. (2017b).

Team, T. (2016, September 19). Let's Look at ABC firm' Growth Strategy. Retrieved from https://www.forbes.com/sites/greatspeculations/2016/09/19/lets-look-at-ABC firm-growth-strategy/#67351bd63d71

Appendix

Figure 1 – Likely Scenario

ABC firm Fiscal 2017 Annual Report

Figure 2 – Worst Case Scenario

ABC firm Fiscal 2017 Annual Report

Figure 3 – Best Case Scenario

ABC firm Fiscal 2017 Annual Report