FIN 3610 Corporate Finance

Inflation distorts balance sheets seasonal factors

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Inflation distorts balance sheets. Seasonal factors distort ratio analysis ‘Window dressing’ techniques distort financial statements. Different accounting practices can distort comparisons. No objective standard on what is good and bad.
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Lecture 4 – Long-Term Financial Planning and Growth Class notes Lecture 4 – Long-Term Financial Planning and Growth Objectives Examine the reasons for financial planning. Outline the process for developing a budget. Present some common problems. Financial Planning Basic Policy Elements ¤ Needed investment in new assets. ¤ Degree of financial leverage the firm uses. ¤ Firm’s dividend policy. ¤ Working capital policy. Financial Planning Process Analyzing the investment and financing choices. Projecting the future consequences of current decisions. Deciding which alternatives to undertake. Measuring subsequent performance against goals. Dimensions of Financial Planning – focus is on capital budgeting for the next two to five years. ¤ Worst case scenario – planning for lean economic times. ¤ Normal growth – firm grows with its markets. ¤ Aggressive growth – rapid growth with market or exceeding market. Planning Accomplishments
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Lecture 4 – Long-Term Financial Planning and Growth Class notes ¤ Examining interactions ¤ Explore options ¤ Avoid surprises ¤ Ensure feasibility and internal consistency Financial Planning Model Percent of Sales Approach – Most variables are proportional to sales. ¤ Inputs and Considerations Sales forecast Asset requirements Financial requirements The plug – external financing needed ¤ Inputs and Considerations Dividend payout ratio Retention ratio Spontaneous financing Fixed asset requirement » Excess capacity » Lumpy assets Determinants of Growth ¤ Profit margin – higher profits support higher growth. ¤ Dividend policy – lower dividend provide more internal funds for growth. ¤ Financial policy – debt can be used for growth.
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Lecture 4 – Long-Term Financial Planning and Growth Class notes ¤ Total asset turnover – increases allow for higher growth. Current assets would support increased sales. Summary Establishes goals and used to evaluate subsequent performance. Forces the financial manager to prepare for adverse events and devise strategies. Proceeds by trial and error.
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Lecture 7 – Interest Rates and Bond Valuation Class notes Lecture 7 Interest Rates and Bond Valuation To explain how bonds are valued Examine different bond features. To explain the relationship between interest rates and bond valuations. Bonds Bond – simply a long-term loan. Treasury Bond – issued by the federal government.
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