FINANCIAL PLANNING - University of Arkansas at Little Rock
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Transcript FINANCIAL PLANNING - University of Arkansas at Little Rock
FINANCE 7311
CORPORATE FINANCIAL
PLANNING
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FINANCIAL PLANNING
Long-Run CORPORATE OBJECTIVES
Maximize the Value of the Firm
Sub-objectives
(INCREASE MARKET SHARE)
STRATEGIES (STEPS)
SPECIFIC ACTION PLAN
SWOT ANALYSIS; 4 P’S
– (PRICE STRATEGY)
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Financial Planning, cont.
PERFORMANCE MEASUREMENT
OJBECTIVE;
SPECIFIC
WERE GOALS ACHIEVED?
(% MARKET SHARE)
BUSINESS PLAN => FINANCIAL
PLAN
Operating
& marketing strategies underlie a
financial plan
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USES OF FINANCIAL PLAN
PROJECTION OF FINANCIAL NEEDS
Financial implications of corporate
strategies
PERFORMANCE MEASUREMENT
A benchmark which reflects strategies
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FINANCIAL MODEL
EQUATIONS
A=D+ E
End Balance = Beg. Bal. + Add - Subtract
PARAMETERS
Tax rate; NWC requirements
DECISION VARIABLES
Investment; Financing
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COMPONENTS
PRO-FORMA FINANCIAL STMTS
CASH
BUDGET
SPECIFIC BUDGETS
Production
Personnel
Marketing; distribution
Capital
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PRO-FORMA B/S & I/S
STEP 1: SALES
FORECAST
Historical data
Growth (size of pie & piece of pie)
Capabilities (prod., mgmt, distrib.)
STEP 2:
OTHER INFORMATION?
YES ==> Use it
Capital spending; Debt Schedule; ETC.
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Pro-Forma’s, cont.
NO
=> Does Account Vary With Sales?
NO ==> SAME BALANCE AS LAST YEAR
YES ==> PERCENTAGE OF SALES
PERCENTAGE OF SALES APPROACH
Increase account by % change in sales
Keeps acct/sales ratio constant
Ratio analysis from before helpful
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% OF SALES EXAMPLE
Last Year Sales:
10,000
Last Year Acct. Rec.
1,000
Forecast Sales Growth: 20%
Forecast Sales: 10,000 X 1.2 = 12,000
Forecast Acct. Rec.1,000 X 1.2 = 1,200
OR: 1,000/10,000 X 12,000 = 1,200
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% of SALES - COMMENTS
Method
of Last Resort
Assets / Sales ratio is optimal
Assumes Full Capacity
Assumes Assets / Sales relation is linear
Economies of Scale
Less than full capacity
Sales decreases
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Pro-Forma F/S, cont.
STEP 3:
EXTERNAL FINANCING
NEED
Balance Sheet Does Not Balance
Plug is the Financing Need
May use Cash or Debt as a Plug
STEP 4:
B/S & I/S RELATIONS
Net Income and Retained Earnings
Depreciation Expense and Accumulated Depreciation
Interest Expense and Debt
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Pro-Forma F/S, cont.
STEP 5:
WHAT-IF ANALYSIS
Use well-planned spreadsheet
Put variables in separate cells
PRO-FORMA EXAMPLE:
SAMPLE
APPAREL COMPANY
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CASH BUDGET
Projection of future cash flows
Performance benchmark
Useful for seasonal companies
More specific information
Provides same ‘financing’ need as proforma financial statements
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Cash Budget, cont.
STEP 1:
Obtain a Sales Forecast
Weekly, Monthly, etc.
STEP 2:
Project Amount & Timing of
Cash Inflows
Primarily collection of sales
How do we estimate timing?
What are other inflows?
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Cash Budget, cont.
STEP 3:
Project amount & timing of cash
outflows
Purchases
Labor
Capital Expenditures
Dividends & interest
Other Expenses
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Cash Budget, cont.
STEP 4:
NET CASH FLOW
STEP 5: FINANCING NEED/SURPLUS
NET CASH FLOW
+ BEGINNING CASH
= ‘ENDING’ CASH
- DESIRED CASH
= FINANCING NEED (= B/S PLUG)
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GROWTH
SOURCE OF SALES GROWTH:
QUANTITY
PRICE
COMBINATION OF BOTH
QUANTITY
INDUSTRY GROWTH (Pie)
MARKET SHARE GROWTH (Piece of Pie)
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Two Growth Rates
INTERNAL GROWTH RATE
Rate of growth without resorting to external
funds
∆ Assets = ∆ Equity
∆ Equity = Net income x retention ratio
IGR = ROA x r
The above computes ROA using BEGINNING
assets
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IGR example
Wal-Mart 1994: ROA = 13.9%
Income = $1.02 : Dividends = $0.13
IGR = 13.9% x .8725 = 12.3%
Suppose expected growth is 23%
=> 10% will have to be financed
externally
10% x 16,800MM = $1.68MM financing
need
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Sustainable Growth Rate
No
external equity issued
Debt issued such that D/E is constant
What happens to D/E with IGR?
Want %∆ in equity = %∆ in debt
==> SGR = ROE x r
Note: ROE is computed using
BEGINNING equity
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Sustainable Growth, cont.
DuPont:
ROE x r = Profitability x turnover x leverage x r
Management choices:
Squeeze more sales $ out of existing assets
Squeeze more income out of existing sales $
Retain more earnings in the firm
Be willing to accept more leverage
Settle for less growth
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GROWTH & FIRM VALUE
Growth should be Value Enhancing
EXAMPLE:
Suppose EPS = $5.00
R = 12.5% (Investors’ required return)
ROE = 15%
r = 0 (No reinvestment)
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Growth Example, cont.
P = D/(R - g)
g = ROE x r = 15% x 0 = 0
P = 5 / (12.5% - 0) = $40.00
P/E = 8
( = 1/R)
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Growth Example, cont.
Now,
suppose r=60% (reinvest 60%)
g = ROE x r = 15% x 60% = 9%
D = 40% x 5.00 = $2.00
P = 2 / (12.5% - 9%) = $57.14
P/E = 11.43
Growth has increased Price and P/E!
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Growth example, cont.
Suppose r = 60% as before
ROE = 10%
g = 10% x 60% = 6%
P = $2 / (12.5% - 6%) = $30.77
P/E = 6.2
Growth has decreased both price and P/E!
Growth creates Value when: ROE > R
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