Chapter 4 Flashcards
What are the aspects of the financial planning process?
I.) Planning horizon- the long-term period (usually 2-5 years)
II.) Aggregation- treating each investment proposal as the sum of a large project.
III.) The creation of alternate business plans (best case, worst case, normal case)
What is accomplished by financial planning?
I.) Examining the interactions between financing and investing
II.) Exploring the options the company can take
III.) Avoiding surprises through contingency planning
IV.) Analyze linkages of goals and examine the feasibility and internal consistency
V.) Communicate with lenders and investors.
What is capital budgeting?
Determining what long-term projects or assets the company should take on.
What does the CFO do?
Oversees cash management, expenditure (treasurer), as well as oversees taxes, cost accounting and data processing (controller).
What are the elements of a financial model?
I.) Sales forecasting
II.) Creating Pro Forma statements
III.) Examining Asset requirements
IV.) Financial requirements
V.) Economic assumptions
VI.) Cash surplus or shortfall
How is the payout ratio computed?
(Cash Dividend)/(Net Income)
How can we derive the retention ratio from the dividend payout ratio?
It is equal to one less the dividend payout ratio.
How do we calculate EFN (External Financing Needed)?
Change in Total assets less change in Liabilities, OE
How is ROA calculated?
PM*TAT
How is ROE calculated?
PMTATEM
How is EM a calculated?
1+D/E ratio
What is a firms determinants of growth
I.) Profit Margin
II.) Dividend policy
III.) Financial policy
IV.) Total asset turnover
What are the caveats of financial planning?
Sometimes they ask the wrong questions, they rely on accounting relationships. Cash flow size, risk and timing are also left out.
