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Question 1

What is the financial planning process

Answer 1

Analysing investment and financing choices open to firm

Projecting future consequences of current decisions

Deciding which alternatives to undertake

Measuring subsequent performance against goals set forth in financial planning

Question 2

What is planning horizon

Answer 2

Time Horizon for a financial plan

Question 3

What are managers often asked to model

Answer 3

Different possible outcomes:
Optimistic case
Expected case
Pessimistic case

Question 4

How do financial plans help managers

Answer 4

Insures their financial strategies are consistent with their capital budgets. They highlight financial decisions necessary to support firms operations and investment goals

Question 5

Why would you make financial plans

Answer 5

Contingency planning
Considering options
Forcing consistency

Question 6

What is contingency planning

Answer 6

Planners need to worry about unlikely events as well as likely ones. If you think ahead of what could go wrong, then you are less likely to ignore dangerous signals and can respond faster to trouble

Question 7

What is considering options

Answer 7

Planners need to think whether there are opportunities for company to exploit its existing strength by moving to wholly new area

Question 8

What is forcing consistency

Answer 8

Financial plans draw out connections between firms plan for growth and financing requirements. Financial plans must ensure that firms goals are mutually consistent

Question 9

What are inputs

Answer 9

Current financial statements. Forecasts of key variables such as sales or interest rates

Question 10

What is the planning model

Answer 10

Equations specifying key relationships

Question 11

What are outputs

Answer 11

Projected financial statements. Financial ratios. Sources and uses of funds

Question 12

What is the long-term financial planning percentage sales model

Answer 12

Sales forecasts are driving variables and most other variables are assumed to be proportional to sales

Balancing item is a variable that adjusts to maintain consistency of a financial plan. Also called plug

Question 13

What is included in financial policy and growth

Answer 13

Internal growth rate
Sustainable growth rate
Determinants of growth

Question 14

What is the internal growth rate

Answer 14

Maximum growth rate that can be achieved with no external financing of any kind

Question 15

What is the sustainable growth rate

Answer 15

Maximum growth rate that can be achieved with no external equity financing while maintaining a constant debt/equity ratio

Question 16

What are the determinants of growth

Answer 16

Profit margin
Total asset turnover
Financial policy
Dividend policy

Question 17

What is profit margin

Answer 17

An increase in profit margin will increase retained earnings therefore, increase sustainable growth

Question 18

What is total asset turnover

Answer 18

An increase in this, increases sales generated by each unit in assets. This decreases need for new assets as sales growth hence, increases sustainable growth rate

Question 19

What is financial policy

Answer 19

An increase in debt/equity ratio makes additional debt financing available which increases sustainable growth rate

Question 20

What is dividend policy

Answer 20

A decrease in dividend payout increases retained earnings hence, increases sustainable growth rate

Question 21

What are the limitations of financial planning models 

Answer 21

Models ignore cash flow, risk, and timing

Shouldn’t be a mechanical process

Shouldn’t be an iterative process