Lecture 2 - Financial Planning Models Elena Simintzi COMM...

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Financial Planning Models Elena Simintzi COMM 370 Lecture 2: Financial Planning 1
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2 Objective Ø In lecture 1 we learned the tools needed to understand where a firm stands today. Ø We now want to learn useful tools to think about where the firm may be in the future . Ø Most firms identify a desired growth rate as a key element of their business strategies. In this lecture we focus on growing firms that need to invest and require financing. Ø We will show how firms can use financial planning models to understand the financial implications of their growth plans. Lecture 2: Financial Planning
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Elements of Financial Planning Investment in new assets – capital budgeting decisions Degree of financial leverage – capital structure decisions Cash paid to shareholders – dividend policy decisions Liquidity requirements – net working capital decisions Ø The four kinds of decisions interact – should be considered together , not in isolation Lecture 2: Financial Planning 3
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Role of Financial Planning } There are many ways in which financial planning can help a firm } Examine interactions – helps management see the interactions between decisions } Explore options – gives management a systematic framework for analyzing its options } Avoid surprises – helps management identify possible outcomes and plan accordingly (especially if things go wrong) } Ensure feasibility and internal consistency – helps management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another (i.e. if they can be achieved simultaneously) } Make managers think about goals and priorities – sometimes plans don’t work, but planning does Lecture 2: Financial Planning 4
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5 Pro-Forma Statements & Financial Planning Objective: to identify the financial requirements of a business plan and evaluate different financing options. We start with a planned (or forecasted) growth rate ( g ) for next year and a set of assumptions about the firm’s: o cost structure (both variable costs and overhead) o credit terms given to customers / obtained from suppliers o interest expense o tax rate o asset requirements (investment needed) o dividend policy Based on these assumptions, we: o first identify the external financing needed (EFN) o then construct the pro-forma financial statements under a specific financing option . Lecture 2: Financial Planning
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6 Sumo Corp - Income Statement for 2012 2012 Sales 6,000.0 COGS (70% of sales) 4,200.0 Operating expenses 500.0 EBIT 1,300.0 Interest expense 150.0 Taxable income 1,150.0 Tax (40% tax rate) 460.0 Net income 690.0 Dividend (1/3 of NI) 230.0 Addition to retained earnings 460.0 Lecture 2: Financial Planning
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7 Sumo Corp - Balance Sheet as of Dec. 2012 Assets: 2012 Liabilities & Equity: 2012 Cash 320.0 Accounts payable 600.0 Acc. receivable 880.0 Notes payable 200.0 Inventory 1,200.0 Current liabilities 800.0 Current assets 2,400.0 Long-term debt 1,800.0 Net fixed assets 3,600.0 Common stock 1,400.0 Retained earnings 2,000.0 Total equity 3,400.0 Total assets 6,000.0 Total liabilities & equity 6,000.0 Lecture 2: Financial Planning
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  • Winter '12
  • VincentGregoire
  • Balance Sheet, Generally Accepted Accounting Principles

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