FINA 330 - Fall 2009 - Chapter 4 Notes

FINA 330 - Fall 2009 - Chapter 4 Notes -...

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Northern Illinois University College of Business FINA 330 – Corporate Finance Prof. Adam Yore LONG-TERM FINANCIAL PLANNING AND GROWTH Long-Run Financial Planning Financial Planning is the process of projecting the future financial position of the firm  and reviewing how that projection compares with various financial goals. Financial  planning provides a road map for how the firm’s financial goals will be achieved in the  upcoming years.  Long-term planning deals with the impact that growth has on the firm’s financials and  identifies whether the firm’s existing investment and financing policies are equipped to  handle it.  The   firm’s   ____________________   decisions   and   its   ____________________  decisions interact with one another and are not separable. Elements of Financial Planning To develop the long-run financial plan, the financial manager must establish the basic  elements of the firm’s financial policy: Investment in New Assets Degree of Financial Leverage Cash Paid to Shareholders Liquidity Requirements Financial Planning Process
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The financial planning process involves: Setting a Planning Horizon Short-run decisions  Long-run decisions Aggregation of All Divisions Realistic Assumptions Develop Scenarios Role of Financial Planning Committing to financial planning forces you to: Examine interactions Explore options Avoid surprises Ensure feasibility and internal consistency Financial Planning Model Ingredients Most financial planning models have the following ingredients: 1. Economic Assumptions  2. Sales Forecast 
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Pro Forma Statements  4. Asset Requirements  5. Financial Requirements  6. Plug Variable  The Simple Financial Planning Model The simplest financial planning model uses the following assumptions: All income statement and balance sheet accounts are directly tied to sales Current relationships are optimal (all items grow with sales) To use this model, follow the four-step process: 1. Forecast sales growth 2. Gross-up sales, costs, and assets by growth rate 3. Decide ‘plug’ value i. Dividends ii. Debt 4. Adjust the balance sheet values using the plug figure to make it balance Example: Minotaur® Brand Energy Drinks, LLC is expecting to have another great year.  The finance department has provided the following information: Their sales force expects that revenues will grow by 15% next year. All items costs are linked to sales and the current relationships are optimal.
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This note was uploaded on 10/17/2009 for the course FINA 330 taught by Professor Dr.adamyore during the Spring '09 term at Northern Illinois University.

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FINA 330 - Fall 2009 - Chapter 4 Notes -...

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