Exam_2_Guide_spring2015 (1) (1).docx

Exam_2_Guide_spring2015 (1) (1).docx - Exam 2 Guide Chapter...

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Exam 2 Guide Chapter 4: Financial Planning 1. Understand the types of Business Plans (3-4 concept questions associated with this) a. Strategic i. Addresses broad, long-term issues, contains summarized, approximate financial projections 1. five-year horizon is common 2. more word goals than number goals 3. firm analyzed itself, the industry and the competitive situation b. Operational i. Translates business ideas (day to day operations) into concrete, short-term projections ii. more detailed than in strategic planning iii. Specifies how much the firm will sell, to whom, and at what prices iv. an equal mix of words and numbers v. Most important planning exercise c. Budgeting i. Short- term updates of the annual plan 1. usually covers three month quarters 2. used in industries in which business conditions change rapidly ii. Mostly financial detail with a few words and more financial detail 1. operational budgets 2. cash budgets 3. capital budgets d. Forecasting i. very short- term projections of profit and cash flow 1. where will the business’s financial momentum carry it in the next few weeks ii. consists almost entirely of numbers iii. helps in order to pay its bills and make payrolls iv. Cash forecasts are projection of short- term cash needs 1. most large firms do monthly cash forecasts 2. Planning assumptions a. Some physical or economic condition that is expected to exist during the planning period. b. Assumptions can reflect any of the forces that influence a firm’s financial results.
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c. Ex: interest rates, taxes, pricing, cost control, volume response to a price change 3. Understand the concept and calculation of Sustainable growth rate (2-3 questions) a. Theoretical measure of its strength. the rate at which the firm can grow if non of its financial ratios chage and if it doesn't raise any new equity by selling stock. the growth in equity created by profits.
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