Professional Documents
Culture Documents
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
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)
10
Definitions of Variables in
AFN
(Continued)
15
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
____________
20
Self-Supporting Growth
Rate
23
24
25
Additional Financing
Needed
AFN = $142.4.
This AFN amount AFN equation
amount.
The difference results because the
profit margin doesnt remain
constant.
26
Forecasted Financial
Statements, Target Ratios
27
Forecasted Financial
Statements, Target Ratios
28
Performance Measures
29
Compensation and
Forecasting
Financing Feedbacks
Financing FeedbacksCircularity
32
Financing FeedbacksSolutions
Manually
Using Excel Iteration feature.
Multi-Year Forecasts:
Buildup in Line of Credit
Issue LT Debt
Issue Equity
Cut dividends
34