Ch 9 Financial Planning Online Lecture - Student

Ch 9 Financial Planning Online Lecture - Student - CHAPTER...

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CHAPTER 9 Corporate Valuation and Financial Planning 1
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Topics in Chapter Financial planning Additional funds needed (AFN) equation Forecasted financial statements Operating input data Financial policy issues Changing ratios 2
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Value = + + ··· + FCF 1 FCF 2 FCF (1 + WACC) 1 (1 + WACC) (1 + WACC) 2 Free cash flow (FCF) Weighted average cost of capital (WACC ) Projected income statements Projected balance sheets Intrinsic Value: Financial Forecasting Projected financing surplus or deficit Forecasting: Operating assumptions Forecasting: Financial policy assumptions
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Financial Planning Process Forecast financial statements under alternative ______________________________ . Forecast the free cash flows to determine the estimated intrinsic stock price. Determine amount of financing needed to support the plan. 4
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The Additional Funds Needed (AFN) Equation AFN equation forecasts the additional financing needed by the operating plan. Basic idea: Estimate new ______________required Subtract new ________________________________ (i.e., accounts payable and accruals) Subtract ____________________________________ (i.e., net income minus dividends) 5
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AFN (Additional Funds Needed) Equation: Key Assumptions Operating at what capacity? Full? Partial? Sales are expected to increase/decrease by? Asset-to-sales ratios forecast. Spontaneous-liabilities-to-sales ratio forecast. Profit margin and payout ratio forecasts. 6
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Definitions of Variables in AFN S 0 : Most recent sales. g: Growth rate in sales. S 1 : Projected sales. S: Increase in sales = g(S 0 ). A 0 *: Assets required to support sales. L 0 *: Spontaneous liabilities. A 0 */S 0 : Capital intensity ratio. L 0 */S 0 : Spontaneous liabilities ratio. M: Profit margin (Net income/Sales) POR: Payout ratio (Dividends/Net income) 7
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Using AFN Equation AFN = Additional assets – Additional spontaneous liabilities – Reinvested profit AFN = (A 0 */S 0 )∆S – (L 0 */S 0 )∆S – M(S 1 )(1 – Payout)
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Key Factors in AFN Equation
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