Chapter04 - Outline L05-1 Chapter 4. Long-term Financial...

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L05-1 Outline Chapter 4. Long-term Financial Planning and Growth Financial Planning Models The Percentage of Sales Approach External Financing and Growth Some Caveats Regarding Financial Planning Models Summary and Conclusions
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L05-2 Financial Planning Long-range planning is a means of systematically thinking about the future and anticipating possible problems before they arrive. Unfortunately, there are no magic answers. So, the best we can hope for is a logical and organized procedure for exploring the unknown. It is commonly cited that the reason for financial distress and failure is due to a lack of effective long-range planning. Financial planning establishes guidelines for change and growth in a firm. It normally focuses on the big picture . This means that it is concerned with major elements of a firm’s financial and investment policies without examining the individual components of those policies in detail. Financial planning examines the interrelationship between investment decisions and financing decisions .
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L05-3 Financial Planning (continued) Financial planning forces the corporation to think about goals. A goal frequently espoused by corporations is growth , and almost all firms use an explicit, companywide growth rate as a major component of their long- term financial planning. This seems to contradict what we learned before; that is, the goal of a financial manager should be increasing the market value of the owner’s equity. However, as we shall see, growth is a convenient way of summarizing various aspects of firm’s financial and investment policies, and so growth rates are commonly used in the planning process. Also, if we think of growth as growth in the market value of the equity in the firm, then goals of growth and increasing the market value of the equity in the firm are not all that different. In order to do a financial planning, we will rely on a technique called the percentage of sales approach .
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Financial Planning (continued) To develop an explicit financial plan, managers must have established certain basic elements of the firm’s financial policy : 1. The firm’s needed investment in new assets: This will arise from the investment opportunities the firm chooses to undertake, and it is the result of the firm’s capital budgeting decisions . 2. The degree of financial leverage the firm chooses to employ: This will determine the amount of borrowing the firm will use to finance its investments in real assets. This is the firm’s capital structure policy . 3. The amount of cash the firm thinks is necessary and appropriate to pay shareholders: This is the firm’s dividend policy . 4. The amount of liquidity and working capital the firm needs on an ongoing basis: This is the firm’s net working capital decision . The decisions a firm makes in these four areas will directly affect its future
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This note was uploaded on 04/13/2010 for the course TECHNOLOGY 032913 taught by Professor Hong during the Spring '08 term at 서울대학교.

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Chapter04 - Outline L05-1 Chapter 4. Long-term Financial...

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