1、3-0CHAPTER3 Financial Planning and Growth3-1Chapter Outline3.1 What is Financial Planning?3.2 A Financial Planning Model:The Ingredients3.3 The Percentage Sales Method3.4 What Determines Growth?3.5 Some Caveats of Financial Planning Models3.6 Summary and Conclusions3-23.1 What is Corporate Financial
2、 Planning?It formulates the method by which financial goals are to be achieved.There are two dimensions:A Time FrameShort run is probably anything less than a year.Long run is anything over that;usually taken to be a two-year to five-year period.A Level of AggregationEach division and operational un
3、it should have a plan.1.As the capital-budgeting analyses of each of the firms divisions are added up,the firm aggregates these small projects as a big project.3-33.1 What is Corporate Financial Planning?Scenario AnalysisEach division might be asked to prepare three different plans for the near term
4、 future:A Worst CaseA Normal CaseA Best Case3-4What Will the Planning Process Accomplish?InteractionsThe plan must make explicit the linkages between investment proposals and the firms financing choices.OptionsThe plan provides an opportunity for the firm to weigh its various options.FeasibilityAvoi
5、ding SurprisesNobody plans to fail,but many fail to plan.3-53.2 A Financial Planning Model:The IngredientsSales forecastPro forma statementsAsset requirementsFinancial requirementsPlugEconomic assumptions3-6Sales ForecastAll financial plans require a sales forecast.Perfect foreknowledge is impossibl
6、e since sales depend on the uncertain future state of the economy.Businesses that specialize in macroeconomic and industry projects can be help in estimating sales.3-7Pro Forma StatementsThe financial plan will have a forecast balance sheet,a forecast income statement,and a forecast sources-and-uses
7、-of-cash statement.These are called pro forma statements or pro formas.3-8Asset RequirementsThe financial plan will describe projected capital spending.In addition it will discuss the proposed uses of net working capital.3-9Financial RequirementsThe plan will include a section on financing arrangeme
8、nts.Dividend policy and capital structure policy should be addressed.If new funds are to be raised,the plan should consider what kinds of securities must be sold and what methods of issuance are most appropriate.3-10PlugCompatibility across various growth targets will usually require adjustment in a
9、 third variable.Suppose a financial planner assumes that sales,costs,and net income will rise at g1.Further,suppose that the planner desires assets and liabilities to grow at a different rate,g2.These two rates may be incompatible unless a third variable is adjusted.For example,compatibility may onl
10、y be reached is outstanding stock grows at a third rate,g3.Read example on p46-473-11Economic AssumptionsThe plan must explicitly state the economic environment in which the firm expects to reside over the life of the plan.Interest rate forecasts are part of the plan.3-12The Steps in Estimation of P
11、ro Forma Balance Sheet:(p50)Express balance-sheet items that vary with sales as a percentage of sales.Multiply the percentages determine in step 1 by projected sales to obtain the amount for the future period.When no percentage applies,simply insert the previous balance-sheet figure into the future
12、period.3-13The Steps in Estimation of Pro Forma Balance Sheet:(continued)Present retained earnings+Projected net income Cash dividendsProjected retained earningsAdd the asset accounts to determine projected assets.Next,add the liabilities and equity accounts to determine the total financing;any diff
13、erence is the shortfall.This equals the external funds needed.Use the plug to fill EFN.Computer Projected retained earnings as3-14A Brief ExampleThe Rosengarten Corporation is think of acquiring a new machine.The machine will increase sales from$20 million to$22 million10%growth.The firm believes th
14、at its assets and liabilities grow directly with its level of sales.Its profit margin on sales is 10%,and its dividend-payout ratio is 50%.Will the firm be able to finance growth in sales with retained earnings and forecast increases in debt?3-15A Brief ExampleCurrent Balance SheetPro forma Balance
15、Sheet(millions)ExplanationCurrent assets$6(6/20=30%)$6.6(22*30%)30%of salesFixed assets$24$26.4120%of salesTotal assets$30$33150%of salesShort-term debt$10$1150%of salesLong-term debt$6$6.630%of salesCommon stock$4$4ConstantRetained Earnings$10$11.1(10+2.2-2.2*50%)Net IncomeTotal financing$30$32.7$0
16、.3Funds needed(millions)3-16The Percentage Sales Method:EFNThe external funds needed for a 10%growth in sales:)1(Sales)Projected(SalesSalesDebtSalesSalesAssetsdpp=Net profit margin=0.10d=Dividend payout ratio=0.5Sales=Projected change in sales=$2 million5.120$30$SalesAssets8.020$16$SalesDebt3-17The
17、Percentage Sales Method:EFNThe external funds needed 000,300$.3m01.1$4.1$)5.022$10.0()2$80.0()2$5.1()1(Sales)Projected(SalesSalesDebtSalesSalesAssetsmmmmmdp3-183.4 What Determines Growth?Firms frequently make growth forecasts on explicit part of financial planning.On the other hand,the focus of this
18、 course has been on shareholder wealth maximization,often expressed through the NPV criterion.One way to reconcile the two is to think of growth as an intermediate goal that leads to higher value.Alternatively,if the firm is willing to accept negative NPV projects just to grow in size,the shareholde
19、rs(but not necessarily the mangers)will be worse off.3-193.3 What Determines Growth?There is a linkage between the ability of a firm to grow and its financial policy when the firm does not issue equity.The Sustainable Growth Rate in Sales is given by:)1()1()1()1(0EDdpTEDdpSS3-20Change in assets=chan
20、ge in debt+change in equityCapital spending=new equity+new debtTS=S1*p*(1-d)+S1*p*(1-d)*D/ES1=S0+ST=A/S3-21The SustainableGrowth Rate in Sales T=ratio of total assets to salesp=net profit margin on salesd=dividend payout ratio)1()1()1()1(0EDdpTEDdpSS3-22EXAMPLE on p52-53 p=1650/10,000=0.165 d=1,195/
21、1,650=0.724,(1-d)=1-0.724=0.276L=5000/5000=1T=10,000/10,000=1S/S0=0.165*0.276*(1+1)/1-0.165*0.276*(1+1)=0.1 3-23Uses of the Sustainable Growth RateA commercial lender would want to compare a potential borrowers actual growth rate with their sustainable growth rate.If the actual growth rate is much h
22、igher than the sustainable growth rate,the borrower runs the risk of“growing broke”and any lending must be viewed as a down payment on a much more comprehensive lending arrangement than just one round of financing.3-24Increasing the SustainableGrowth RateA firm can do several things to increase its
23、sustainable growth rate:Sell new shares of stockIncrease its reliance on debtReduce its dividend-payout ratioIncrease profit marginsDecrease its asset-requirement ratio3-253.5 Some Caveats of Financial Planning ModelsFinancial planning models do not indicate which financial polices are the best.They
24、 are often simplifications of realityand the world can change in unexpected ways.Without some sort of plan,the firm may find itself adrift in a sea of change without a rudder for guidance.3-26Summary&ConclusionsFinancial planning forces the firm to think about and forecast the future.It involvesBuil
25、ding a corporate financial model.Describing different scenarios of future development from best to worst case.Using the models to construct pro forma financial statements.Running the model under different scenarios(sensitivity analysis).Examining the financial implications of ultimate strategic plan
26、s.3-27Summary&ConclusionsCorporate financial planning should not become an end in an of itself.If it does,it will probably focus on the wrong things.The alternative to financial planning is stumbling into the future.3-28Multiple Choice 1.The process of combining smaller projects into a large budget
27、for planning purposes is called A)aggregation.B)consolidation.C)assumption.D)capital allocation.E)None of the above.3-29Answer:A 3-302.Projected future financial statements are called A)plug statements.B)pro forma statements.C)reconciled statements.D)aggregated statements.E)none of the above.3-31Ans
28、wer:B 3-323.The percentage of sales method A)requires that all accounts grow at the same rate.B)separates accounts that vary with sales and those that do not vary with sales.C)allows the analyst to calculate how much financing the firm will need to support the predicted sales level.D)Both A and B.E)
29、Both B and C.3-33Answer:E 3-344.An example of an economic assumption would be A)growth in sales.B)growth in the capital spending requirement.C)a plug variable.D)change in interest rates.E)growth in dividends.3-35Answer:D 3-365.Accounts receivable are$45,000 and are directly proportional to total sal
30、es.The sales forecast for next year is$125,000,which represents a 5%growth over the current year.The forecast accounts receivable would be A)$42,750 B)$45,000 C)$47,250 D)It is impossible to calculate without last years credit sales.E)None of the above.3-37Answer:CRationale:$45,000(1.05)=$47,2503-38
31、6.Financial planning models frequently assume that many variables are proportional to A)economic growth.B)industry growth.C)interest rates.D)company sales.E)None of the above.3-39Answer:D 3-407.If forecasted net income is$3,600 and the expected dividend is$1,098 and the tax rate is 34%,what is the r
32、etention ratio?A).198 B).30 C).70 D).802 E)None of the above.3-41Answer:CRationale:1-($1,098/$3,600)=1-.3=.73-428.Last year,Ram Company reported the following financial data:Sales=$400,Costs=$200,Taxes=$50,Net Income=$150,Total Assets=$1,200,Debt=$600,and Equity=$600.Assets and costs are proportiona
33、l to sales.Debt is not.A dividend of$90 was paid,and Ram wishes to maintain a constant payout to net income.Next years sales are projected to be$480.What are external funds needed(EFN)?A)$240 B)$132 C)$60 D)$168 E)None of the above.3-43Answer:D Rationale:EFN=($1200/$400*80)-0(80)-(150/400)($480)(1-(
34、$90/$150)=$240-$0-$180(1-.6)=$240-$72=$168.Since debt does not move proportionally with sales,the second part of the equation is zero.3-44QUESTION&PROBLEMS3.4 ON P563-45a.Using the formula from the book:=1(6,400,000)-.4375(6,400,000)-.0625(38,400,000(1-.7)=2,880,000AssetsDebtEFNSalesSalesProfitMargi
35、n Sales1-DvdPayoutSalesSales3-46New Debt=Projected Debt-Current Debt=2,800,000 -2,000,000=$800,0003-47b.Pro Forma Balance Sheet Optimal Scam CompanyCurrent assets$19,200,000Fixed assets19,200,000Total assets$38,400,000Current liabilities$12,000,000Long-term debt4,800,000Total liabilities$16,800,000C
36、ommon stock(14*1.2)$16,880,000Accumulated retained earnings（4+0.6*1.2）4,720,000Total equity$21,600,000Total liabilities and equity$38,400,0003-48C.(1)(1)Sustainable growth(1)(1)0.0625(.3)(1.7778)0.03453.45%10.0625(0.3)(1.7778)SPdLSTPdL3-49d.Optimal Scam is far below its growth rate objective.Cutting
37、 the dividend to zero will not be enough.It could only attain a 12.5%growth rate by eliminating the dividend.Optimal Scam must increase its asset utilization and/or its profit margin substantially to be able to achieve its objective growth rate.Optimal could also increase its debt load;this action will increase ROE.
