Unit 5 Flashcards
a plan for controlling cash inflows and outflows business to balance income with expenditures.
Cash budgets
For cash sales, the business receives cash at the time sales are made to customers.
Cash Receipts
suppliers who sell you raw materials that you can use to produce items to sell or to provide services.
Cash Disbursements
the projection of future earnings after all the projected costs are subtracted from the projected sales.
Profit forecasting-
using sales growth and profit forecast to construct a pro forma balance sheet to understand the future implications of the sources and uses of finances.
Balance sheet forecasting
a financial statement the projects an estimate for future periods “as if” sales grew as predicted.
Pro forma statements-
it is the sum (or net) of the present values of all of the project’s expected cash inflows and outflows.
NPV
the rate of return that a firm earns on its capital projects.
Internal Rate of Return (IRR)-
the required rate of return that a company expects to earn in order to consider a project.
Hurdle rate
when a limited amount of funds is available.
Capital constrained environment
when two or more events do not coincide.
Mutually exclusive-
the ratio of payoff to investment for proposed project.
Profitability index (PI)-
Another name for discretionary financing needed or external financing needed. It represents the additional financing needed given a firm’s expectations for future growth.
Additional Funds Needed (AFN)
When a limited amount of funds are available.
Capital-constrained Environment
Accounts that do not vary automatically with sales but are left to the discretion of management.
Discretionary Accounts
The additional financing needed given a firm’s expectations for future growth.
Discretionary Financing Needed (DFN)
Another name for the discretionary financing needed or additional funds needed. It represents that additional financing needed given a firm’s expectations for future growth.
External Financing Needed (EFN)
Accounts that vary naturally with sales
Spontaneous Accounts
The level of growth where four key financial ratios- profitability, asset utilization, leverage, and payout - are constant and where the firm does need to issue any new equity to fund the growth.
Steady State Growth
The growth rate that allows a firm to maintain its presents financial ratios without issuing new equity
Sustainable Growth Rate (SGR)
An expense that you do not have direct control over and that remains constant from period to period.
Fixed Expenditures
An expense that you have direct control over and that can change from period to period
Variable Expenditures
- is easy to interpret,
- considers time value of money, and
- does not require use of required rate of return.
Advantages of IRR
- is not a good indicator of the amount of value created,
- ignores mutually exclusive projects,
- cannot be used to compare projects with different durations, and
- requires conventional cash flows.
Disadvantages of IRR
o Requires calculation of appropriate cost of capital
o Is not useful to compare projects of varying sizes
o no sense of return.
Disadvantage of NPV
o Considers time value of money
o Calculates value added to the firm
o Considers risk and required return
Advantages to NPV
- Considers the time value of money
- Takes into account the risk of future cash flows through the cost of capital
- Includes all future cash flows
- Indicates whether an investment will create value for the company
Advantages of PI
- requires calculation of cost of capital and
- is not useful for mutually exclusive projects.
Disadvantages of PI
- requires calculation of cost of capital and
- is not useful for mutually exclusive projects.
Disadvantages of PI
- Project sales revenues and expenses
- Forecast change in spontaneous balance sheet accounts
- Deal with discretionary accounts
- Estimate fixed asset account
- Calculate retained earnings (RE)
- Determine total financing need (projected total assets)
- Calculate DFN
The Percent of Sales Method
