FIN303 CHAPTER 24 REVIEW
FIN303 CHAPTER 24 REVIEW FIN303
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Giulia Dias Roncoletta
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This 3 page Class Notes was uploaded by Giulia Dias Roncoletta on Monday February 15, 2016. The Class Notes belongs to FIN303 at University of Miami taught by Douglas R. Emery in Winter 2016. Since its upload, it has received 21 views. For similar materials see Corporate Finance Management in Finance at University of Miami.
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Date Created: 02/15/16
CHAPTER 24 24.1 THE FINANCIAL PLANNING PROCESS - How does the operating income respond to increase in output - a ﬁrms total sources of funds must equal its total uses of funds in any ﬁnite planning period. The Financial Plan Financial Planning: is a process of evaluating the impact of alternative investing and ﬁnancing decisions. - it has inputs, a model, and outputs - inputs: projection of sales, collections, costs, interest rates, and exchange rates - model: mathematical formula with a relationship between in and out puts - outputs: pro forma ﬁnancial statements Pro Forma Financial Statements: are projected (forecasted) ﬁnancial statements Budget: is a detailed schedule of a ﬁnancial activity, such as an advertising budget, etc. A Model’s Planning Horizon: is the length of time its projects into the future. (short <5, long 5>) A complete ﬁnancial plan includes, at a minimum: 1. clearly stated strategic, operating, and ﬁnancial objectives 2. assumptions on which the plan is based 3. descriptions of the strategies 4. contingency plans for emergencies 5. categorized budgets 6. ﬁnancing program 7. period by period pro forma ﬁnancial statements Bottom Up and Top Down Planning: Bottom Up Planning: starts at the production level or product and proceeds upward through the plant and division levels to top management. Ideas are added, modiﬁed, and deleted at each level. Top Down Planning: starts with the ﬁrms top management and its strategic plans and goals proceeds downward though the organization’s levels. Good planning includes both types of planning. * 3 Phases of Financial Planning: (1) formulating the plan: should be formulated by using the bottom up top down planning (2) implementing the plan: budges, resources, operating policies - ﬂexibility (3) evaluating the plan: overall performance to the ﬁnancial plan Beneﬁts of the Financial Plan: (1) Standardizing assumptions: make it possible to compare alternative plans (2) Future Orientation: generates new ideas and eliminates bad ones (3) Objectivity: increases the objective pursuit of the plan (4) Employee Development: it includes inputs from all employees (5) Lender Requirements: details necessary for borrowing (6) Better Performance Evaluation: provides a benchmark (7) Preparing for Contingencies: ready for unlikely outcomes 24.2 CASH BUDGETING Cash Budgeting: is the process of projecting (forecasting) and summarizing a ﬁrm;s cash inﬂows and outﬂows expected during the planning horizon. - a positive net cash ﬂow can increase cash, reduce outstanding loans, - are used in short-term plans 24.3 PRO FORMA FINANCIAL STATEMENTS Percent of Sales Forecasting Method: a shortcut to pro forma statements and budgets. Easy method to estimate the funds required to ﬁnance growth. Additional Financing Needed (AFN) = (Required increase in assets) - ( Increase in liabilities) - (Increase in retained earnings) AFN = (A/S) g S -0(L/S) g S - 0[(1+g)S - D0 AFN = additional ﬁnancing needed A/S = increase in assets required per dollar increase in sales L/S = increase in liabilities required per dollar increase in sales S = sales for the current year 0 g = growth in sales M = net proﬁt margin on sales D = cash dividends planned for common stock Cash Flow Break-Even Point: is the point below which the ﬁrm will need either to obtain additional ﬁnancing, or to liquidate some of its assets to meet its ﬁxed costs. - it forces the company to be ready for contingencies - Control risk by: (1) change its ﬁnancial leverage (2) change its operating leverage and its break even point (3) change some combination of the two. - control risk by creating contingency plans for dealing with bad outcomes. Alternatives for Inadequate Funds: 1. Reduce the growth rate: manageable level by not fully meeting the demand for its product, raise selling price. 2. Sell Assets: assets which aren't required to run the ﬁrm 3. Obtain New External Financing: 4. Reduce or stop paying dividends
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