Chapter 4 Flashcards

1
Q

What is the planning horizon?

A

Divide decisions into short-run decisions (usually next 12 months) and long-run decisions (usually 2-5 years)

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2
Q

What is aggregation?

A

Combine capital budgeting decisions into one big project.

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3
Q

What will financial planning accomplish?

A
  1. Examining interactions: helps management see the interactions between decisions
  2. Exploring options: gives management a systematic framework for exploring its opportunities
  3. Avoiding surprises: helps management identify possible outcomes and plan accordingly
  4. Ensuring Feasibility and Internal Consistency: helps management determine if goals can be accomplished and if the various stated (and unstated) goals of the firm are consistent with one another
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4
Q

What are the ingredients for the financial planning model?

A
  1. Sales Forecast
  2. Pro Forma Statements
  3. Asset Requirements
  4. Financial Requirements
  5. Plug Variable
  6. Economic Assumptions
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5
Q

What happens at low growth levels for internal financing?

A

internal financing (retained earnings) may exceed the required investment in assets

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6
Q

What happens as the growth rate increases for internal financing?

A

internal financing will not be enough and the firm will have to go to the capital markets for money

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7
Q

What is the internal growth rate?

A
  • It tells us how much the firm can grow assets using retained earnings as the only source of financing.
  • IGR = (ROA x b)/(1 - ROA x b)
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8
Q

What is the sustainable growth rate?

A
  • It tells us how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio.
  • SGR = (ROE x b)/(1 - ROE x b)
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9
Q

What are the elements of financial planning?

A
  • Investment in new assets (capital budgeting decisions)
  • Degree of financial leverage (capital structure decisions)
  • Cash paid to shareholders (dividend policy decisions)
  • Liquidity requirements (NWC decisions)
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