1、Chapter 4Long-Term Financial Planning and Growth,McGraw-Hill/Irwin,Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.,Key Concepts and Skills,Understand the financial planning process and how decisions are interrelated Be able to develop a financial plan using the percentage of s
2、ales approach Be able to compute external financing needed and identify the determinants of a firms growth Understand the four major decision areas involved in long-term financial planning Understand how capital structure policy and dividend policy affect a firms ability to grow,4-2,Chapter Outline,
3、What Is Financial Planning? Financial Planning Models: A First Look The Percentage of Sales Approach External Financing and Growth Some Caveats Regarding Financial Planning Models,4-3,Elements of Financial Planning,Investment in new assets determined by capital budgeting decisions Degree of financia
4、l leverage determined by capital structure decisions Cash paid to shareholders determined by dividend policy decisions Liquidity requirements determined by net working capital decisions,4-4,Financial Planning Process,Planning Horizon - divide decisions into short-run decisions (usually next 12 month
5、s) and long-run decisions (usually 2 5 years) Aggregation - combine capital budgeting decisions into one large project Assumptions and Scenarios Make realistic assumptions about important variables Run several scenarios where you vary the assumptions by reasonable amounts Determine, at a minimum, wo
6、rst case, normal case, and best case scenarios,4-5,Role of Financial Planning,Examine interactions help management see the interactions between decisions Explore options give management a systematic framework for exploring its opportunities Avoid surprises help management identify possible outcomes
7、and plan accordingly Ensure feasibility and internal consistency help management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another,4-6,Financial Planning Model Ingredients,Sales Forecast many cash flows depend directly o
8、n the level of sales (often estimated using sales growth rate) Pro Forma Statements setting up the plan using projected financial statements allows for consistency and ease of interpretation Asset Requirements the additional assets that will be required to meet sales projections Financial Requiremen
9、ts the amount of financing needed to pay for the required assets Plug Variable determined by management deciding what type of financing will be used to make the balance sheet balance Economic Assumptions explicit assumptions about the coming economic environment,4-7,Example: Historical Financial Sta
10、tements,4-8,Example: Pro Forma Income Statement,Initial Assumptions Revenues will grow at 15% (2,000*1.15) All items are tied directly to sales, and the current relationships are optimal Consequently, all other items will also grow at 15%,4-9,Example: Pro Forma Balance Sheet,Case I Dividends are the
11、 plug variable, so equity increases at 15% Dividends = 460 (NI) 370 (increase in equity) = 90 dividends paid Case II Debt is the plug variable and no dividends are paid Debt = 1,150 (600+460) = 90 Repay 400 90 = 310 in debt,4-10,Percentage of Sales Approach,Some items vary directly with sales, while
12、 others do not Income Statement Costs may vary directly with sales - if this is the case, then the profit margin is constant Depreciation and interest expense may not vary directly with sales if this is the case, then the profit margin is not constant Dividends are a management decision and generall
13、y do not vary directly with sales this influences additions to retained earnings Balance Sheet Initially assume all assets, including fixed, vary directly with sales Accounts payable will also normally vary directly with sales Notes payable, long-term debt and equity generally do not vary directly w
14、ith sales because they depend on management decisions about capital structure The change in the retained earnings portion of equity will come from the dividend decision,4-11,Example: Income Statement,Assume Sales grow at 10%,Dividend Payout Rate = 50%,4-12,Example: Balance Sheet,4-13,Which one of th
15、e following capital intensity ratios indicates the largest need for fixed assets per dollar of sales? A. 0.70 B. 0.86 C. 1.00 D. 1.06 E. 1.15,The plowback ratio is: A. equal to net income divided by the change in total equity. B. the percentage of net income available to the firm to fund future grow
16、th. C. equal to one minus the retention ratio. D. the change in retained earnings divided by the dividends paid. E. the dollar increase in net income divided by the dollar increase in sales.,Example: External Financing Needed,The firm needs to come up with an additional $200 in debt or equity to mak
17、e the balance sheet balance TA TL&OE = 10,450 10,250 = 200 Choose plug variable ($200 EFN) Borrow more short-term (Notes Payable) Borrow more long-term (LT Debt) Sell more common stock (CS & APIC) Decrease dividend payout, which increases the Additions To Retained Earnings,4-16,A firms external fina
18、ncing need is financed by which of the following? A. retained earnings B. net working capital and retained earnings C. net income and retained earnings D. debt or equity E. owners equity, including retained earnings,Example: Operating at Less than Full Capacity,Suppose that the company is currently
19、operating at 80% capacity. Full Capacity sales = 5000 / .8 = 6,250 Estimated sales = $5,500, so we would still only be operating at 88% Therefore, no additional fixed assets would be required. Pro forma Total Assets = 6,050 + 4,000 = 10,050 Total Liabilities and Owners Equity = 10,250 Choose plug va
20、riable (for $200 EXCESS financing) Repay some short-term debt (decrease Notes Payable) Repay some long-term debt (decrease LT Debt) Buy back stock (decrease CS & APIC) Pay more in dividends (reduce Additions To Retained Earnings) Increase cash account,4-18,Blasco Industries is currently at full-capa
21、city sales. Which one of the following is limiting sales to this level? A. net working capital B. long-term debt C. inventory D. fixed assets E. debt-equity ratio,Sales can often increase without increasing which one of the following? A. accounts receivable B. cost of goods sold C. accounts payable
22、D. fixed assets E. inventory,Work the Web Example,Looking for estimates of company growth rates? What do the analysts have to say? Check out Yahoo Finance click the web surfer, enter a company ticker and follow the “Analyst Estimates” link,4-21,Growth and External Financing,At low growth levels, int
23、ernal financing (retained earnings) may exceed the required investment in assets As the growth rate increases, the internal financing will not be enough, and the firm will have to go to the capital markets for money Examining the relationship between growth and external financing required is a usefu
24、l tool in long-range planning,4-22,The Internal Growth Rate,The internal growth rate tells us how much the firm can grow assets using retained earnings as the only source of financing. Using the information from Tashas Toy Emporium ROA = 1200 / 9500 = .1263 B = .5,4-23,The Sustainable Growth Rate,Th
25、e sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio. Using Tashas Toy Emporium ROE = 1200 / 4100 = .2927 b = .5,4-24,Determinants of Growth,Profit margin operating efficiency Total asset turnover asset u
26、se efficiency Financial leverage choice of optimal debt ratio Dividend policy choice of how much to pay to shareholders versus reinvesting in the firm,4-25,Important Questions,It is important to remember that we are working with accounting numbers; therefore, we must ask ourselves some important que
27、stions as we go through the planning process: How does our plan affect the timing and risk of our cash flows? Does the plan point out inconsistencies in our goals? If we follow this plan, will we maximize owners wealth?,4-26,Quick Quiz,What is the purpose of long-range planning? What are the major d
28、ecision areas involved in developing a plan? What is the percentage of sales approach? How do you adjust the model when operating at less than full capacity? What is the internal growth rate? What is the sustainable growth rate? What are the major determinants of growth?,4-27,Comprehensive Problem,X
29、YZ has the following financial information for 2009: Sales = $2M, Net Inc. = $0.4M, Div. = $0.1M C.A. = $0.4M, F.A. = $3.6M C.L. = $0.2M, LTD = $1M, C.S. = $2M, R.E. = $0.8M What is the sustainable growth rate? If 2010 sales are projected to be $2.4M, what is the amount of external financing needed, assuming XYZ is operating at full capacity, and profit margin and payout ratio remain constant?,4-28,End of Chapter,4-29,
