# FMchap17 - Chapter 17 Financial Planning and Forecasting...

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After reading this chapter, students should be able to: Briefly explain the following terms: mission statement, corporate scope, corporate purpose, corporate objectives, and corporate strategies. Briefly explain what operating plans are. Identify the six steps in the financial planning process. List the advantages of computerized financial planning models over “pencil-and-paper” calculations. Discuss the importance of sales forecasts in the financial planning process, and why managers construct pro forma financial statements. Briefly explain the steps involved in the percent of sales method. Calculate additional funds needed (AFN), using both the projected financial statement approach and the formula method. Identify other techniques for forecasting financial statements discussed in the text and explain when they should be used. Learning Objectives: 17 - 1 Chapter 17 Financial Planning and Forecasting LEARNING OBJECTIVES

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In Chapter 3, we looked at where the firm has been and where it is now--its current strengths and weaknesses. Now, in Chapter 17, we look at where it is projected to go in the future. The details of what we cover, and the way we cover it, can be seen by scanning Blueprints , Chapter 17. 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) Lecture Suggestions: 17 - 2 LECTURE SUGGESTIONS
17-1 Accounts payable, accrued wages, and accrued taxes increase spontaneously and proportionately with sales. Retained earnings increase, but not proportionately. 17-2 The equation gives good forecasts of financial requirements if the ratios A*/S 0 and L*/S 0 , as well as M and RR, are stable. Otherwise, another forecasting technique should be used. 17-3 False. At low growth rates, internal financing will take care of the firm’s needs. 17-4 False. The use of computerized planning models is increasing. 17-5 a. +. b. -. The firm needs less manufacturing facilities, raw materials, and work in process. c. +. It reduces spontaneous funds; however, it may eventually increase retained earnings. d. +. e. +. f. Probably +. This should stimulate sales, so it may be offset in part by increased profits. g. 0. h. +. Answers and Solutions: 17 - 3 ANSWERS TO END-OF-CHAPTER QUESTIONS

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17-1 AFN = (A*/S 0 ) S - (L*/S 0 ) S - MS 1 (RR) = \$5,000,000 \$3,000,000 \$1,000,000 - \$5,000,000 \$500,000 \$1,000,000 - 0.05(\$6,000,000)(0.3) = (0.6)(\$1,000,000) - (0.1)(\$1,000,000) - (\$300,000)(0.3) = \$600,000 - \$100,000 - \$90,000 = \$410,000. 17-2 AFN = (0.3) (\$300,000) - 00,000) (0.1)(\$1,0 - \$1,000,000 \$5,000,000 \$4,000,000 = (0.8)(\$1,000,000) - \$100,000 - \$90,000 = \$800,000 - \$190,000 = \$610,000. The capital intensity ratio is measured as A*/S
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FMchap17 - Chapter 17 Financial Planning and Forecasting...

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