Chapter_4_FI311_FA2011_SS - Click to edit Master title...

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Click to edit Master title style 10/25/11 1 Chapter 4 Long-Term Financial Planning and Growth
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Click to edit Master title style 10/25/11 2 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
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Click to edit Master title style 10/25/11 3 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
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Click to edit Master title style 10/25/11 4 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
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Click to edit Master title style 10/25/11 5 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
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Click to edit Master title style 10/25/11 6 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
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