393_lecture4

393_lecture4 - Financial Planning Lecture 4 Myung Joo Song...

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Unformatted text preview: Financial Planning Lecture 4 Myung Joo Song ECON 393 Fall 2011 Myung Joo Song (ECON 393) Financial Planning Fall 2011 1 / 18 Elements of Financial Planning Investment in new assets: determined by capital budgeting decisions Degree of financial leverage: determined by capital structure decisions Cash paid to shareholders: determined by dividend policy decisions Liquidity requirements: determined by net working capital decisions Myung Joo Song (ECON 393) Financial Planning Fall 2011 2 / 18 Financial Planning Process Planning Horizon: divide decisions into short-run decisions (usually next 12 months) and long-run decisions (usually 2 - 5 years). Aggregation: combine capital budgeting decisions into one large project. Assumptions and Scenarios: Make realistic assumptions about important variables Run several scenarios where you vary the assumptions by reasonable amounts Determine, at a minimum, worst case, normal case, and best case scenarios Myung Joo Song (ECON 393) Financial Planning Fall 2011 3 / 18 Role of Financial Planning Examine interactions: help management see the interactions between decisions. Explore options: give management a systematic framework for exploring its opportunities. Avoid surprises: help management identify possible outcomes and plan accordingly. Ensure feasibility and internal consistency: help management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another. Myung Joo Song (ECON 393) Financial Planning Fall 2011 4 / 18 Financial Planning Model Ingredients Sales Forecast: many cash flows depend directly on the level of sales (often estimated using sales growth rate)...
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393_lecture4 - Financial Planning Lecture 4 Myung Joo Song...

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