Chapter 9 Flashcards
What are the two components of financial planning?
- The operating plan - guidance for a firms operation and what financing will be required
- The financial plan - where do you get money to support plan
What do you have to forecast if FCF is positive
how much to allocate among investors/put aside for marketable securities
What do you have to forecast if FCF is negative
how much stock or debt the firm will have to issue
What is the Forecasted Financial Statement Method (FFS)
method were you forecast the entire F.S
What are the three initiatives for FFS Method
- Improve revenue growth
-Improve operations
-Do both
How do you determine which of the intrinsic methods for the FFS is best?
look at the intrinsic stock value for each
What is the Additional Funds needed (AFN) method
a simple way to ballpark estimate additional external financing that will be required
What are the 5 key factors to the AFN method
- Sales growth (g)
- Capital intensity (A0*/S0): the amount of assets required per dollar of sales
- spontaneous liabilites to sales ratio (L0*/S0)
- Profit Margin (PM=Net income/sales)
- Payout ratio (POR = DPS/EPS)
if a company has rapid growth what do they require
large increase in assets and large amounts of external financing
if a company has high assets to sales rations what does that mean
they require a large number of new assets for any given increase in sales
if a company can increase its spontaneous liabilities then it can
reduce its need for external financing
the higher the profit margin of a company then…
the more NI available to support increase in assets
what does the payout ratio mean
The less of its income a company distributes as dividends the larger it’s addition to R.E
If (g) increases, how does it affect AFN
AFN would need to increase
If capital intensity increased (A0*/S0) then what would happen to AFN
it would increase
if spontaneous liabilities increased (L0*/S0) then what would happen to AFN
it would decrease
if profit margin increased what would happen to AFN
it would decrease
If payout ratio increased then what would happen to AFN
lncrease
… paying more then you need more funds
What is the self-supporting growth rate
the maximum growth rate that the firm could achieve if it had no access to external capital
- how much it could grow on its own
What does forecasting when rations change entail?
normal AFN equation assumes ratio of assets and liabilities remains same over time
this isn’t always right cause of economies of scale
What are lumpy assets
when a firm must add fixed assets in large, discrete units
E.g paper industry basic paper mill equipment
