Chapter 9

Question 1

What are the two components of financial planning?

Answer 1

1. The operating plan - guidance for a firms operation and what financing will be required
2. The financial plan - where do you get money to support plan

Question 2

What do you have to forecast if FCF is positive

Answer 2

how much to allocate among investors/put aside for marketable securities

Question 3

What do you have to forecast if FCF is negative

Answer 3

how much stock or debt the firm will have to issue

Question 4

What is the Forecasted Financial Statement Method (FFS)

Answer 4

method were you forecast the entire F.S

Question 5

What are the three initiatives for FFS Method

Answer 5

• Improve revenue growth
  -Improve operations
  -Do both

Question 6

How do you determine which of the intrinsic methods for the FFS is best?

Answer 6

look at the intrinsic stock value for each

Question 7

What is the Additional Funds needed (AFN) method

Answer 7

a simple way to ballpark estimate additional external financing that will be required

Question 8

What are the 5 key factors to the AFN method

Answer 8

1. Sales growth (g)
2. Capital intensity (A0*/S0): the amount of assets required per dollar of sales
3. spontaneous liabilites to sales ratio (L0*/S0)
4. Profit Margin (PM=Net income/sales)
5. Payout ratio (POR = DPS/EPS)

Question 9

if a company has rapid growth what do they require

Answer 9

large increase in assets and large amounts of external financing

Question 10

if a company has high assets to sales rations what does that mean

Answer 10

they require a large number of new assets for any given increase in sales

Question 11

if a company can increase its spontaneous liabilities then it can

Answer 11

reduce its need for external financing

Question 12

the higher the profit margin of a company then…

Answer 12

the more NI available to support increase in assets

Question 13

what does the payout ratio mean

Answer 13

The less of its income a company distributes as dividends the larger it’s addition to R.E

Question 14

If (g) increases, how does it affect AFN

Answer 14

AFN would need to increase

Question 15

If capital intensity increased (A0*/S0) then what would happen to AFN

Answer 15

it would increase

Question 16

if spontaneous liabilities increased (L0*/S0) then what would happen to AFN

Answer 16

it would decrease

Question 17

if profit margin increased what would happen to AFN

Answer 17

it would decrease

Question 18

If payout ratio increased then what would happen to AFN

Answer 18

lncrease
… paying more then you need more funds

Question 19

What is the self-supporting growth rate

Answer 19

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

Question 20

What does forecasting when rations change entail?

Answer 20

normal AFN equation assumes ratio of assets and liabilities remains same over time

this isn’t always right cause of economies of scale

Question 21

What are lumpy assets

Answer 21

when a firm must add fixed assets in large, discrete units

E.g paper industry basic paper mill equipment