4.Long Term Financial Planning

Question 1

Ingredients of Financial Planning Models

Answer 1

® Economic Assumptions – explicit assumptions about the present and future economic environment
® Sales Forecast – many cash flows depend directly on the level of sales (often estimated by using sales growth rates)
® Pro Forma Statements – the output format for our model. Setting up the plan as projected financial statements allows for consistency and ease of interpretation
Pro Forma Statements
➯ Asset Requirements – the additional capital spending for assets that will be required to meet sales projections
➯ Financial Requirements – the amount of financing needed to pay for the required assets
➯ Plug Variable – the “valve” of the model. Management decision about what type of financing will be used (makes the balance sheet balanced)

Question 2

Internal Growth Rate

Answer 2

Internal Growth Rate максимальный рост без внешних финансирований
• The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing.
• At the internal growth rate, the required increase in assets exactly equals the additions to retained earnings.

Question 3

Internal Growth rate is the maximum growth rate that can be achieved with no external Financing of any kind

The sustainable growth ratw is the maximum growth rate that can be achieved with no external equity financing while maintaining a constant debt equity ratio

Answer 3

d+b= 1

Question 4

Sustainable Growth Rate

Answer 4

Tells us how much firm can grow by
using internally generated funds
and issuing debt to maintain a constatnt debt equity ratio

Question 5

Determinants of Growth

Answer 5

Profit Margin- operating efficiency

Total asset turnover- asset use efficiency

Financial leverage- choise of optimal debt ratio

Divident policy- choice of how much to pay to sharegolders versus reinvesting in the firm