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FM8e- EOC Sol Ch08 - Chapter 8 Financial Planning and...

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Chapter 8 Financial Planning and Forecasting Financial Statements ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS We like to use discussion questions along with relatively simple and easy to follow calculations for our lectures. Unfortunately, forecasting is by its very nature relatively complex, and it simply cannot be done in a realistic manner without using a spreadsheet. Accordingly, our primary “question” for Chapter 8 is really a problem, but one that can be discussed. Therefore, we base our lecture primarily on the BOC model, ch08BOC-model, and we use the class period to discuss forecasting and Excel modeling. We cover the chapter in about 2 hours, and then our students work a case on the subject later in the course. 8-1 The major components of the strategic plan include the firm’s purpose , the scope of its operations , its specific (quantified) objectives , its operating strategies , its operating plan , and its financial plan . Engineers, economists, marketing experts, human resources people, and so on all participate in strategic planning, and development of the plan is a primary function of the senior executives. Regional and world economic conditions, technological changes, competitors’ likely moves, supplies of resources, and the like must all be taken into account, along with the firm’s own R&D activities. The effects of all these forces, under alternative strategic plans, are analyzed by use of forecasted financial statements. In essence, the financial statements are used to simulate the company’s operations under different economic conditions and corporate strategic plans. Since the strategic plan is necessarily somewhat nebulous, it is sometimes neglected in practice on the grounds that it is difficult to quantify. We can only note that if a company doesn’t think about the direction in which its industry is going, it is likely to end up in bankruptcy, as most bankruptcies occur because an inaccurate business plan. 8-2 a. The sales forecast is the primary driver of the financial plan. Forecasted sales determine the amount of capacity needed, inventory and receivables levels, profits, and capital requirements. If a company forecasts its sales incorrectly, this can be disastrous, as Cisco and Lucent learned recently. We discuss sales forecasting in the BOC model. b. See the BOC model for a detailed explanation. Essentially, we take the prior year’s financial statements and then change them to reflect (1) changes in sales and (2) policies that will affect things like the amount of inventories carried to support a given amount of sales. c. See the BOC model for a detailed explanation. Essentially, we project the assets that will be required to support the forecasted Answers and Solutions: 8 - 1
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level of sale, and we also project the amount of funds that will be available from retained income and spontaneous sources of funds.
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