CFFM6, ch 16, IM, 11-12-08 - LearningObjectives Chapter16 ,...

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Chapter 16 Financial Planning and Forecasting Learning Objectives After reading this chapter, students should be able to: Discuss the importance of strategic planning and the central role that financial forecasting plays in the  overall planning process. Explain how firms forecast sales. Use the Additional Funds Needed (or AFN) equation and discuss the relationship between asset  growth and the need for funds. Explain how spreadsheets are used in the forecasting process, starting with historical statements,  ending with projected statements, and including a set of financial ratios based on those projected  statements. Discuss how planning is an iterative process. Chapter 16:  Financial Planning and Forecasting Learning Objectives 173
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Lecture Suggestions In Chapter 4, we looked at where the firm has been and where it is now—its current strengths and  weaknesses.  Now, in Chapter 16, we look at where it is projected to go in the future. What we cover, and the way we cover it, can be seen by scanning the slides and Integrated Case  solution for Chapter 16, which appears at the end of this chapter solution.  For other suggestions about  the lecture, please see the “Lecture Suggestions” in Chapter 2, where we describe how we conduct our  classes. DAYS ON CHAPTER:  3 OF 58 DAYS (50-minute periods) 174 Lecture Suggestions Chapter 16:  Financial Planning and Forecasting
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Answers to End-of-Chapter Questions 16-1 The need for external financing depends on the following key factors: 1. Sales growth ( S).  Rapidly growing companies require large increases in assets, other  things held constant. 2. Capital intensity (A 0 */S 0 ).  The amount of assets required per dollar of sales, the capital  intensity ratio, has a major effect on capital requirements.  Companies with high assets-to- sales ratios require more assets for a given increase in sales, hence have a greater need for  external financing. 3. Spontaneous liabilities-to-sales ratio (L 0 */S 0 ).  Companies that spontaneously generate a  large amount of funds from accounts payable and accruals have a reduced need for external  financing. 4. Profit margin (M).  The higher the profit margin, the larger the net income available to support  increases in assets, hence the lower the need for external financing. 5. Retention ratio (RR).  Companies that retain a high percentage of their earnings rather than  paying them out as dividends generate more retained earnings and thus need less external  financing.
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