Chapter 4 Flashcards
1
Q
What is the planning horizon?
A
Divide decisions into short-run decisions (usually next 12 months) and long-run decisions (usually 2-5 years)
2
Q
What is aggregation?
A
Combine capital budgeting decisions into one big project.
3
Q
What will financial planning accomplish?
A
- Examining interactions: helps management see the interactions between decisions
- Exploring options: gives management a systematic framework for exploring its opportunities
- Avoiding surprises: helps management identify possible outcomes and plan accordingly
- Ensuring Feasibility and Internal Consistency: helps management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another
4
Q
What are the ingredients for the financial planning model?
A
- Sales Forecast
- Pro Forma Statements
- Asset Requirements
- Financial Requirements
- Plug Variable
- Economic Assumptions
5
Q
What happens at low growth levels for internal financing?
A
internal financing (retained earnings) may exceed the required investment in assets
6
Q
What happens as the growth rate increases for internal financing?
A
internal financing will not be enough and the firm will have to go to the capital markets for money
7
Q
What is the internal growth rate?
A
- It tells us how much the firm can grow assets using retained earnings as the only source of financing.
- IGR = (ROA x b)/(1 - ROA x b)
8
Q
What is the sustainable growth rate?
A
- It tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio.
- SGR = (ROE x b)/(1 - ROE x b)
9
Q
What are the elements of financial planning?
A
- Investment in new assets (capital budgeting decisions)
- Degree of financial leverage (capital structure decisions)
- Cash paid to shareholders (dividend policy decisions)
- Liquidity requirements (NWC decisions)
