Financial Planning and Growth Flashcards
What is Financial Planning?
Formulates the method by which financial goals are to be achieved
– What is to be done in the future?
Two dimensions of Financial Planning:
T
A
Two dimensions of Financial Planning:
– A Time Frame
– A Level of Aggregation
A Time Frame (Dimension)
– Short run is less than a ___.
– Long run is usually a __-year to ___-year period.
A Time Frame (Dimension)
– Short run is less than a year.
– Long run is usually a two-year to five-year period.
A Level of Aggregation (Dimension)
– Each division and operational unit should have a ____.
– As the capital-budgeting analyses of each of the firm’s divisions are added up, the firm aggregates these smaller projects into ____ ____ project.
A Level of Aggregation (Dimension)
– Each division and operational unit should have a plan.
– As the capital-budgeting analyses of each of the firm’s divisions are added up, the firm aggregates these smaller projects into one big project.
Scenario Analysis
– Each division might be asked to prepare three different plans for the near term future:
- A ____ Case: ____
- A ____ Case: ____
- A ____ Case: ______
Scenario Analysis
- A Worst Case: making the worst possible assumptions about the company’s products and the state of economy.
- A Normal Case: making most likely assumptions about the company and the economy.
- A Best Case: each division would be required to work out a case based on the most optimistic assumptions.
What Will the Planning Process Accomplish?
- Interactions
- Options
- Feasibility
- Avoiding Surprises
What Will the Planning Process Accomplish?
- Interactions: explicit the linkages between
investment proposals and the firm’s financing choices. - Options: opportunity for the firm to weigh its various options.
- Feasibility: fit into the overall corporate objective of maximizing shareholder wealth.
- Avoiding Surprises: failure
A Financial Planning Model: The Ingredients
- SF
- PF
- A R
- F R
- P
- E A
A Financial Planning Model: The Ingredients
- Sales forecast
- Pro forma statements
- Asset requirements
- Financial requirements
- Plug
- Economic assumptions
All financial plans _____ a sales forecast.
All financial plans require a sales forecast.
Sales Forecast:
Perfect foreknowledge is impossible since sales
depend on the _____ future state of the economy.
Sales Forecast:
Perfect foreknowledge is impossible since sales
depend on the uncertain future state of the economy.
Sales Forecast:
Consulting firms that specialize in ______ and industry projects can help in estimating sales.
Sales Forecast:
Consulting firms that specialize in macroeconomic and industry projects can help in estimating sales.
Ex. Sept11, 2001 resulted in lower sales forecasts for many firms, especially in the airlines and travel industry.
____ ___ Statements:
The financial plan will have a forecast balance sheet, income statement, and cash flow statement.
B I CF
Pro Forma Statements:
The financial plan will have a forecast balance sheet, income statement, and cash flow statement.
Asset Requirements:
The financial plan will:
– describe _____ capital spending; and
– discuss the proposed ____ of net working capital.
Asset Requirements:
The financial plan will:
– describe projected capital spending; and
– discuss the proposed uses of net working capital.
Financial Requirements:
- The plan will include a section on financing _____.
- ____ policy and capital ____ policy should be addressed.
Financial Requirements:
- The plan will include a section on financing arrangements.
- Dividend policy and capital structure policy should be addressed.
Financial Requirements:
If new funds are to be raised, the plan should consider:
– what kinds of _____ must be sold, and
– what methods of ____ are most appropriate.
If new funds are to be raised, the plan should consider:
– what kinds of securities must be sold, and
– what methods of issuance are most appropriate.
• E.g., raise equity by selling shares.
In order to “balance” the balance sheet, a “___” may be required.
In order to “balance” the balance sheet, a “plug” may be required.
Ex. Suppose a financial planner assumes:
– sales, costs, and net income increase at g1.
– assets and liabilities will grow at a different rate, g2.
–> unbalanced
A variable must become the “plug” and grow at a different rate g3 ; the variable may be:
– ____ shares
– ______ debt
– ______ debt
A variable must become the “plug” and grow at a different rate g3 ; the variable may be:
– Outstanding shares
– Short-term debt
– Long-term debt
Economic Assumptions:
The plan must explicitly state the economic environment in which the firm expects to operate over the life of the plan. Ex. ?
Economic Assumptions:
The plan must explicitly state the economic environment in which the firm expects to operate over the life of the plan.
Ex. interest rate forecasts.
GIGO principle?
The plan will be as accurate as the underlying assumptions used to forecast.
Economic Assumptions:
GIGO principle: garbage in, garbage out
8 Steps to Prepare a Pro Forma Statements:
- IS
- D
- %
- F B (or)
- P F
- RE
- EFN
- P
8 Steps to Prepare a Pro Forma Statements:
- Prepare the forecast income statement.
- Determine projected dividend payments
- Express each item as a percentage of sales.
- Multiply the percentages determined in step 3 by projected sales to obtain the balances for the future period.
- Where no percentage applies, insert the previous balance sheet figure from the most recent statement.
- Compute Projected retained earnings
- Total the asset accounts Total the liabilities and equity accounts (difference is the shortfall = EFN)
- Use the plug to fill EFN.
There is a linkage between the ability of a firm to grow and its financial policy when the firm does not issue _____.
There is a linkage between the ability of a firm to grow and its financial policy when the firm does not issue equity.
Sustainable Growth Rate in Sales is given by:
T = ____
p = ____
d = ____
T = ratio of total assets to sales p = net profit margin on sales d = dividend payout ratio
A good use of the SGR is to compare a firm’s SGR with their _____ growth rate to determine if there is a balance between ____ and ____.
A good use of the SGR is to compare a firm’s SGR with their actual growth rate to determine if there is a balance between growth and profitability.
- used by commercial lenders
If the actual growth rate > SGR, the borrower runs the risk of “________”
If the actual growth rate > SGR, the borrower runs the risk of “growing broke.”
- high risk to the lender
If the firm is losing money or is paying out more than 100% of earnings as dividends, then the retention ratio (1-d) will be _____.
If the firm is losing money or is paying out more than 100% of earnings as dividends, then the retention ratio (1-d) will be negative.
A negative SGR signals the rate at which sales and assets must _____.
A negative SGR signals the rate at which sales and assets must shrink.
- sell assets, close divisions
