1、Chapter 4Long-Term Financial Planning and GrowthMcGraw-Hill/IrwinCopyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.Key Concepts and SkillsUnderstand the financial planning process and how decisions are interrelatedBe able to develop a financial plan using the percentage of sales

2、approachBe able to compute external financing needed and identify the determinants of a firms growthUnderstand the four major decision areas involved in long-term financial planningUnderstand how capital structure policy and dividend policy affect a firms ability to grow4-2Chapter OutlineWhat Is Fin

3、ancial Planning?Financial Planning Models: A First LookThe Percentage of Sales ApproachExternal Financing and GrowthSome Caveats Regarding Financial Planning Models4-3Elements of Financial PlanningInvestment in new assets determined by capital budgeting decisionsDegree of financial leverage determin

4、ed by capital structure decisionsCash paid to shareholders determined by dividend policy decisionsLiquidity requirements determined by net working capital decisions4-4Financial Planning ProcessPlanning Horizon - divide decisions into short-run decisions (usually next 12 months) and long-run decision

5、s (usually 2 5 years)Aggregation - combine capital budgeting decisions into one large projectAssumptions and ScenariosMake realistic assumptions about important variablesRun several scenarios where you vary the assumptions by reasonable amountsDetermine, at a minimum, worst case, normal case, and be

6、st case scenarios4-5Role of Financial PlanningExamine interactions help management see the interactions between decisionsExplore options give management a systematic framework for exploring its opportunitiesAvoid surprises help management identify possible outcomes and plan accordinglyEnsure feasibi

7、lity 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 another4-6Financial Planning Model IngredientsSales Forecast many cash flows depend directly on the level of sales (often estimated

8、using sales growth rate)Pro Forma Statements setting up the plan using projected financial statements allows for consistency and ease of interpretationAsset Requirements the additional assets that will be required to meet sales projectionsFinancial Requirements the amount of financing needed to pay

9、for the required assetsPlug Variable determined by management deciding what type of financing will be used to make the balance sheet balanceEconomic Assumptions explicit assumptions about the coming economic environment4-7Example: Historical Financial StatementsGourmet Coffee Inc.Balance SheetDecemb

10、er 31, 2009Assets1000Debt400Equity600Total1000Total1000Gourmet Coffee Inc.Income StatementFor Year Ended December 31, 2009Revenues2000Less: costs(1600)Net Income4004-8Example: Pro Forma Income StatementInitial AssumptionsRevenues will grow at 15% (2,000*1.15)All items are tied directly to sales, and

11、 the current relationships are optimalConsequently, all other items will also grow at 15%Gourmet Coffee Inc.Pro Forma Income StatementFor Year Ended 2010Revenues2,300Less: costs(1,840)Net Income4604-9Example: Pro Forma Balance SheetCase IDividends are the plug variable, so equity increases at 15%Div

12、idends = 460 (NI) 370 (increase in equity) = 90 dividends paidCase IIDebt is the plug variable and no dividends are paidDebt = 1,150 (600+460) = 90Repay 400 90 = 310 in debtGourmet Coffee Inc.Pro Forma Balance SheetCase 1Assets1,150Debt460Equity690Total1,150Total1,150Gourmet Coffee Inc.Pro Forma Bal

13、ance SheetCase 2Assets1,150Debt90Equity1,060Total1,150Total1,1504-10Percentage of Sales ApproachSome items vary directly with sales, while others do notIncome StatementCosts may vary directly with sales - if this is the case, then the profit margin is constantDepreciation and interest expense may no

14、t vary directly with sales if this is the case, then the profit margin is not constantDividends are a management decision and generally do not vary directly with sales this influences additions to retained earningsBalance SheetInitially assume all assets, including fixed, vary directly with salesAcc

15、ounts payable will also normally vary directly with salesNotes payable, long-term debt and equity generally do not vary directly with sales because they depend on management decisions about capital structureThe change in the retained earnings portion of equity will come from the dividend decision4-1

16、1Example: Income StatementTashas Toy EmporiumIncome Statement, 2009% of SalesSales5,000Less: costs(3,000)60%EBT2,00040%Less: taxes (40% of EBT)(800)16%Net Income1,20024%Dividends600Add. To RE600Tashas Toy EmporiumPro Forma Income Statement, 2010Sales5,500Less: costs(3,300)EBT2,200Less: taxes(880)Net

17、 Income1,320Dividends660Add. To RE660Assume Sales grow at 10%Dividend Payout Rate = 50%4-12Example: Balance SheetTashas Toy Emporium Balance SheetCurrent% of SalesPro FormaCurrent% of SalesPro FormaASSETSLiabilities & Owners EquityCurrent AssetsCurrent Liabilities Cash$50010%$550A/P$90018%$990 A/R2,

18、000402,200N/P2,500n/a2,500 Inventory3,000603,300 Total3,400n/a3,490 Total5,5001106,050LT Debt2,000n/a2,000Fixed AssetsOwners Equity Net PP&E4,000804,400 CS & APIC2,000n/a2,000Total Assets9,50019010,450 RE2,100n/a2,760 Total4,100n/a4,760Total L & OE9,50010,2504-13Which one of the following capital in

19、tensity ratios indicates the largest need for fixed assets per dollar of sales?A.0.70B.0.86C.1.00D.1.06E.1.15The 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 growth.C.equal to one minus the retention

20、 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 NeededThe firm needs to come up with an additional $200 in debt or equity to make the balance sheet balanceTA TL&OE = 10,450

21、10,250 = 200Choose 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 Earnings4-16A firms external financing need is financed by which of the following?A.re

22、tained earningsB.net working capital and retained earningsC.net income and retained earningsD.debt or equityE.owners equity, including retained earningsExample: Operating at Less than Full CapacitySuppose that the company is currently operating at 80% capacity.Full Capacity sales = 5000 / .8 = 6,250

23、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 = 10,050Total Liabilities and Owners Equity = 10,250Choose plug variable (for $200 EXCESS financing)Repay some short-term debt (decrease

24、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 account4-18Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this level?A.net

25、working capitalB.long-term debtC.inventoryD.fixed assetsE.debt-equity ratioSales can often increase without increasing which one of the following?A.accounts receivableB.cost of goods soldC.accounts payableD.fixed assetsE.inventoryWork the Web ExampleLooking for estimates of company growth rates?What

26、 do the analysts have to say?Check out Yahoo Finance click the web surfer, enter a company ticker and follow the “Analyst Estimates” link4-21Growth and External FinancingAt low growth levels, internal financing (retained earnings) may exceed the required investment in assetsAs the growth rate increa

27、ses, the internal financing will not be enough, and the firm will have to go to the capital markets for moneyExamining the relationship between growth and external financing required is a useful tool in long-range planning4-22The Internal Growth RateThe internal growth rate tells us how much the fir

28、m can grow assets using retained earnings as the only source of financing.Using the information from Tashas Toy EmporiumROA = 1200 / 9500 = .1263B = .54-23The Sustainable Growth RateThe sustainable growth rate tells us how much the firm can grow by using internally generated funds and issuing debt t

29、o maintain a constant debt ratio.Using Tashas Toy EmporiumROE = 1200 / 4100 = .2927b = .54-24Determinants of GrowthProfit margin operating efficiencyTotal asset turnover asset use efficiencyFinancial leverage choice of optimal debt ratioDividend policy choice of how much to pay to shareholders versus reinvesting in the firm4-25Important QuestionsIt is important to remember that we are working with accounting numbers; therefore, we must ask ourselves some important questions as w