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Unformatted text preview: Chapter 17 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 17: Financial Planning and Forecasting Learning Objectives 197 Answers to End-of-Chapter Questions 17-1 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 */S ). 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 */S ). 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. 17-2 False. At low growth rates, internal financing will take care of the firm’s needs. 17-3 False. The use of computerized planning models is increasing because of the information they provide. 17-4 Accounts payable, accrued wages, and accrued taxes increase spontaneously with sales. Retained earnings increase, but only to the extent that dividends paid do not equal 100% of net income and the profit margin is positive. 17-5 a. +. b.-. The firm needs less manufacturing facilities, raw materials, and work in process....
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This note was uploaded on 11/08/2011 for the course MAT/FIN 272 taught by Professor Burns during the Spring '11 term at Central Connecticut State University.
- Spring '11