ActSc371_Lecture 6_Chapter 3 (Ross)

# ActSc371_Lecture 6_Chapter 3 (Ross) - ActSc 371 Corporate...

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Lecture 6 Sections 3.3- and 3.4 from Chapter 3: Introduction to Corporate Finance (Corporate Finance by Ross et al.) ActSc 371 – Corporate Finance 1 Instructor: Dr. Lysa Porth 1

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Introduction Introduction to Corporate Finance 3.3 The Percentage Sales Method 3.4 What Determines Growth? 2
Financial Planning and Growth 3.3 The Percentage of Sales Method Simple planning models assume that every item increases at the same rate as sales. For elements such as long-term borrowing, this assumption is probably not reasonable. Long-term borrowing is something that is usually set by management and does not necessarily relate to sales levels. This section looks at an extended version of the simple planning model. Separate the statement of comprehensive income and the balance sheet accounts into two groups: 1. Those that do vary directly with sales. 2. Those that do not vary directly with sales. Result: given a sales forecast, we will then be able to calculate how much financing the firm will need to support the predicted sales level. 3

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4 1. Express balance-sheet items that vary with sales as a percentage of sales. 2. Multiply the percentages determine in step 1 by projected sales to obtain the amount for the future period. 3. When no percentage applies, simply insert the previous balance-sheet figure into the future period. The Steps in Estimation of Pro Forma Balance Sheet: Financial Planning and Growth
5 4. Compute Projected retained earnings as: Projected retained earnings = Present retained earnings + Projected net income – Cash dividends 6. Add the asset accounts to determine projected assets. Next, add the liabilities and equity accounts to determine the total financing; any difference is the shortfall . This equals the external funds needed. 7. Use the plug to fill EFN. The Steps in Estimation of Pro Forma Balance Sheet: Financial Planning and Growth

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6 The St. Laurence Corporation is thinking of acquiring a new machine. The machine will increase sales from \$20 million to \$22 million
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## This note was uploaded on 12/16/2011 for the course ACSTC 371 taught by Professor Lisaporth during the Fall '11 term at Waterloo.

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ActSc371_Lecture 6_Chapter 3 (Ross) - ActSc 371 Corporate...

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