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Topics in Chapter
Financial planning
Additional funds needed (AFN)
equation
Forecasted financial statements
Sales forecasts
Operating input data
Financial policy issues
Changing ratios
2
Forecasting:
Operating
assumptions
Projected
income
statements
Projected
additional
financing
needed (AFN)
Financial policy
assumptions
Projected
balance
sheets
Weighted average
cost of capital
(WACC)
FCF1
Value =
(1 + WACC)1
FCF2
+
(1 + WACC)2
FCF
+ +
(1 +
WACC)
Elements of Strategic
Plans
Mission statement
Corporate scope
Statement of corporate objectives
Corporate strategies
Operating plan
Financial plan
4
Establish a performance-based
management compensation
system that rewards employees for
creating shareholder wealth.
Management must monitor
operations after implementing the
plan to spot any deviations and
then take corrective actions.
6
Steps in Financial
Forecasting
Forecast sales
Project the assets needed to support
sales
Project internally generated funds
Project outside funds needed
Decide how to raise funds
See effects of plan on ratios and stock
price
Cash
A/R
Inventory
C/Assets
Fixed Assets
Total Assets
3.0
3.0
5.0
11.0
$
3.0
14.0
A/P
Notes Payable
C/Liabs
L/T Debt
Common Equity
$
$
2.0
1.5
3.5
3.0
7.5
14.0
Sales
X Profit Margin
= Profit (NI)
- Div Payout (40%)
= Addts to RE
60.0
x .05
$
=3.0
- 1.2
=1.8
Prob #2
2011 Balance Sheet
Cash & sec.
Accounts rec.
Inventories
Total CA
Net fixed
Assets
Total assets
$100
100
$200
100
500
200
$1000
Prob #2
2011 Income Statement
Sales
Less: COGS (60%)
SGA costs
EBIT
Interest
EBT
Taxes (40%)
Net income
Dividends (30%)
$2,000.00
1,200.00
700.00
$100.00
16.00
$84.00
33.60
$50.40
$15.12
Key Ratios
BEP
Profit Margin
ROE
DSO
Inv. turnover
F.A. turnover
T.A. turnover
Debt/assets
TIE
Current ratio
NWC
Industry
Condition
10.00%
2.52%
7.20%
20.00%
4.00%
15.60%
Poor
Poor
Poor
36.00%
9.40x
3.00x
Poor
Poor
Poor
Poor
Good
Poor
Poor
Key Ratios
(Continued)
NWC
Ind.
Cond.
3.00%
5.00% Poor
(NOPAT/Sales)
Oper. capital requirement
18
19
Comparison of Hatfield to
Industry Using DuPont
Equation
ROE = NI/S S/TA TA/E
NI/S = $24/$2,000 = 1.2%
S/TA = $2,000/$1,200 = 1.67
TA/E = $1,200/$500 = 2.4
ROEHatfield = 1.2% 1.67 2.4 = 4.8%.
ROEIndustry
11.6%.
Comparison
(Continued)
21
Definitions of Variables in
AFN
(Continued)
26
Possible Ratio
Relationships: Constant
A*/S
Ratios
Inventories
400
300
200
100
A*/S
= 100/200
= 50%
200
400
A*/S
= 200/400
= 50%
Sales
400
300
A*/S
= 300/200
= 150%
Base
Stock
200
400
A*/S
= 400/400
= 100%
Sales
424
300
200
400
Sales
Possible Ratio
Relationships: Lumpy
Increments
Net plant
Capacity
Excess Capacity
(Temporary)
Sales
Self-Supporting Growth
Rate
Self-Supporting growth rate is the maximum
growth rate the firm could achieve if it had
no access to external capital.
Self-supporting g =
M(1 POR)S0
______________________________
POR)S0
(0.012)(10.35)($2,000)
______________________________________________
$15.60
g=
= 1.44%
$1,084
____________
31
Self-Supporting Growth
Rate
34
35
36
Additional Financing
Needed
AFN = $142.4.
This AFN amount AFN equation
amount.
The difference results because the
profit margin doesnt remain
constant.
37
Forecasted Financial
Statements, Target Ratios
38
Forecasted Financial
Statements, Target Ratios
39
Performance Measures
40
Compensation and
Forecasting
Financing Feedbacks
Financing FeedbacksCircularity
43
Financing FeedbacksSolutions
Manually
Using Excel Iteration feature.
Multi-Year Forecasts:
Buildup in Line of Credit
Issue LT Debt
Issue Equity
Cut dividends
45