Chapter 21: Strategic and Operational Financial Planning. Corporate Finance, 3e Graham, Smart, and Megginson. Financial planning activities. Setting long-run strategic goals Preparing quarterly and annual budgets Managing day-to-day fluctuations in cash balances. - PowerPoint PPT Presentation
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Popular growth measures:Return on Investment (ROI)Economic Value Added (EVA)
Growth can be defined by increases in firm’s market value, its asset base, the number of people it employs, or any number of other metrics.Most firms measure growth in terms of
1. The firm will issue no new shares of common stock next year.2. The firm’s total asset turnover ratio, S/A, remains constant.3. The firm pays out a constant fraction, d, of its earnings as
dividends.4. The firm maintains a constant asset-to-equity ratio, A/E.5. The firm’s net profit margin, m, is constant.
The model is used to derive the sustainable growth rate g* that keeps the sources and uses of funds in
balance.
E
Adm
S
AE
Adm
g)1(
)1(*
The sustainable growth rate can be increased by…•an increase in the profit margin,•an increase in the ratio of assets to equity,•an increase in the total asset turnover ratio, or•a reduction in dividend payouts.
“Top-down” approach uses macroeconomic and industry forecast to establish sales goals.
“Bottom-up” approach forecasts sales on a customer by customer basis.
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Forecasts of balance sheet and income statements
“Top-down” or “bottom-up” sales forecasts:
Percentage-of-sales method
• Assumes all items grow in proportion to sales
• One item, such as the cash balance or a short-term liability account, is the “plug figure,” which is adjusted after all projections to preserve the equality of left and right sides of the balance sheet.
Changes in a firm’s collection or payment pattern alter the timing and magnitude of its financing needs.
A slowdown in collections increases the firm’s short-term financing needs, and conversely, a speedup in collections decreases the firm’s financing needs. A speedup in payments would likely increase
the firm’s financing needs. A slowdown in payments would reduce