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Lecture Fundamentals of corporate finance - Chapter 4: Long-term financial planning and corporate growth

Learning objectives of this chapter include: How to apply the percentage of sales method, how to compute the external financing needed to fund a firm’s growth, the determinants of a firm’s growth, some of the problems in planning for growth. | T4.1 Chapter Outline Chapter 4 Long-Term Financial Planning and Corporate Growth Chapter Organization 4.1 What is Financial Planning? 4.2 Financial Planning Models: A First Look 4.3 The Percentage of Sales Approach 4.4 External Financing and Growth 4.5 Some Caveats Regarding Financial Planning Models 4.6 Summary and Conclusions CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. T4.2 Financial Planning Model Ingredients Sales Forecast Drives the model Pro Forma Statements The output summarizing different projections Asset Requirements Investment needed to support sales growth Financial Requirements Debt and dividend policies The “Plug” Designated source(s) of external financing Economic Assumptions State of the economy, interest rates, inflation T4.3 Example: A Simple Financial Planning Model Recent Financial Statements Income statement Balance sheet Sales $100 Assets $50 Debt $20 Costs 90 Equity 30 Net Income $ 10 Total $50 Total $50 Assume that: 1. sales are projected to rise by 25% 2. the debt/equity ratio stays at 2/3 3. costs and assets grow at the same rate as sales T4.3 Example: A Simple Financial Planning Model (concluded) Pro Forma Financial Statements Income statement Balance sheet Sales $ Assets $ Debt Costs Equity Net $ Total $ Total $ T4.3 Example: A Simple Financial Planning Model (concluded) Pro Forma Financial Statements Income statement Balance sheet Sales $ 125 Assets $ 62.5 Debt $ 25 Costs 112.5 Equity 37.5 Net $ 12.5 Total $ 62.5 Total $ 62.5 What’s the plug? Notice that projected net income is $12.50, but equity only increases by $7.50. The difference, $5.00 paid out in cash dividends, is the plug. Income Statement (projected growth = 30%) Original Pro forma Sales $2000 $_ (+30%) Costs 1700 2210 (= 85% of sales) EBT 300 _ Taxes (34%) 102 132.6 Net income 198 257.4 Dividends 66 85.8 (= 1/3 of net) Add. to ret. Earnings _ | T4.1 Chapter Outline Chapter 4 Long-Term Financial Planning and Corporate Growth Chapter Organization 4.1 What is Financial Planning? 4.2 Financial Planning Models: A First Look 4.3 The Percentage of Sales Approach 4.4 External Financing and Growth 4.5 Some Caveats Regarding Financial Planning Models 4.6 Summary and Conclusions CLICK MOUSE OR HIT SPACEBAR TO ADVANCE Irwin/McGraw-Hill copyright © 2002 McGraw-Hill Ryerson, Ltd. T4.2 Financial Planning Model Ingredients Sales Forecast Drives the model Pro Forma Statements The output summarizing different projections Asset Requirements Investment needed to support sales growth Financial Requirements Debt and dividend policies The “Plug” Designated source(s) of external financing Economic Assumptions State of the economy, interest rates, inflation T4.3 Example: A Simple Financial Planning Model Recent Financial Statements Income statement Balance sheet Sales $100 Assets $50 Debt $20 Costs 90 Equity 30 Net Income $ 10 Total $50 Total $50 .