Magna International Case

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We are using the percentage of sales approach to calculate EFN for Magna International Inc.

The Income Statement: We start with the most recent Income Statement for year 2011 to forecast for year 2012. Magna has projected an increase in sales of 10% for the coming year, so we are anticipating a sales of $31,622.80 in 2012 (see Appendix 1 & Appendix 3). To generate a Pro Forma Income Statement we assume that costs and expenses continue to run at the same percentage of sales as they were in year 2011 (See Appendix 1 & Appendix 3). To check this, notice that our % of Sales in 2011 and 2012 are same; so it is unchanged. We exclude (from 2012 Forecast) Interest Expense, Equity income because they are non-operating loss/income and also Other Expense and Net loss attributable to non-controlling interests because they are Special Items.
Next, we need to project the dividend payment.
Magna International has continuously been increasing their dividends. As per Management’s message to Shareholders (see Appendix 6), Magna increased its dividend’s by 39% in 2011 are planning to increase dividends by another 10% in 2012.

Dividend Payout Ratio (2012) = Cash dividend (See Appendix 5) = 236+ (10%*236)/ Net Income 1143.11 (from Appendix 1) = 22.71%

Retention Ratio (2012) = 1 – Dividend Payout Ratio = 1-0.2271 = 0.7729 = 77.29 %

Projected addition to RE = 1143.11*0.7729 = $ 883.51

Projected dividends paid to shareholders = 1143.11*0.2271 = $259.60

The Balance Sheet: To generate a Pro Forma Balance Sheet, we start by calculating the % of sales (2011) the items that are directly related to sales. Long Term Liabilities and Shareholders’ Equity do not vary with sales, thus they have been marked as “n/a” in the % of sales column (See Appendix 2). We have assumed that the ratio remains constant for all the marked items. An example for illustration is given below:

Capital Intensity Ratio 2011: Total assets 14,679 / 28,748=0.51 (See Appendix 4, Appendix
3)

Capital Intensity Ratio 2012: Total Assets 15,957 / 31,622.80 = 0.51 (See Appendix 2, Appendix 1)

On the liability side of the Balance Sheet, we see how Account Payables vary with sale. This logically makes sense because we will expect to place more orders with our suppliers as Sales volume in 2012 increases by 10% (as given in Question). Similarly, we use “n/a” for Long Term Debt and Common Stock as they do not automatically change with Sales. Retained Earnings varies with Sales but it is not a simple percentage of Sales. Instead we use the numbers we calculated with the Retention Ratio. Notice that the RE in 2012 increased by $ 883.51.

Inspecting our Pro Forma Balance Sheet, we notice that Assets are projected to increase by $1278.70. However, without additional financing, Liabilities and Equity increase by $1455.91, creating an excess of 1455.91 – 1278.70 = $ 177.21 (See Appendix 2). Thus we have a negative EFN which indicates that we have an excess internal financing for year 2012. Therefore, having too much Capital, Magna International can either put excess funds in cash which has the effect of changing the current asset growth rate. Or the management may choose to repurchase debt and equity with the excess funds.

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EFN Calculation