Chapter_4_FI311_FA2011_SS

Chapter_4_FI311_FA2011_SS - Click to edit Master title...

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Unformatted text preview: Click to edit Master title style 10/25/11 1 10/25/11 Chapter 4 Long-Term Financial Planning and Growth Click to edit Master title style 10/25/11 2 10/25/11 Key Concepts and Skills • Understand the financial planning process and how decisions are interrelated • Be able to develop a financial plan using the percentage of sales approach • Be able to compute external financing needed and identify the determinants of a firm’s growth • Understand the four major decision areas involved in long-term financial planning • Understand how capital structure policy and dividend policy affect a firm’s ability to grow Click to edit Master title style 10/25/11 3 10/25/11 Elements of Financial Policy 1. Investment in new assets – determined by capital budgeting decisions 2. Degree of financial leverage – determined by capital structure decisions 3. Cash paid to shareholders – determined by dividend policy decisions 4. Liquidity and working capital requirements – determined by net working capital decisions Click to edit Master title style 10/25/11 4 10/25/11 Dimensions of Financial Planning • Planning Horizon - divide decisions into short-run decisions (usually next 12 months) and long-run decisions (usually 2 – 5 years). Focus on the long run. • 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 Click to edit Master title style 10/25/11 5 10/25/11 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 Click to edit Master title style 10/25/11 6 10/25/11 Financial Planning Model Ingredients • Sales Forecast – many cash flows depend directly on the level of sales (often estimated using sales growth rate) • Pro Forma Statements – setting up the plan using projected financial statements allows for consistency and ease of interpretation • Asset Requirements – the additional assets that will be required to meet sales projections • Financial Requirements – the amount of financing needed to pay for the required assets • Plug Variable – determined by management deciding what type of financing will be used to make the balance sheet...
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This note was uploaded on 10/25/2011 for the course FI 311 taught by Professor Booth during the Fall '06 term at Michigan State University.

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Chapter_4_FI311_FA2011_SS - Click to edit Master title...

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