Week 4 - Financial Forecasting & Intro to Working Capital Management Flashcards
(11 cards)
1
Q
How to start approach to creating pro forma financial statements
A
- start with a growth rate (g)
- end with calculating EFN (then choose plug)
2
Q
At low growth levels…
A
internal financing (retained earnings) may exceed the required investment in assets so EFN NEGATIVE
3
Q
At high growth levels
A
internal financing may not be enough to pay for new assets and the firm will have to go to financial markets for money (EFN = Positive)
4
Q
External Funds Needed
A
g = growth rate
A = existing assets
S = existing sales
p = profit margin = (Net Income/Sales)
R = Retention Ratio = 1 - Dividend Payout Ratio (divident payout ratio = dividends/net income)
5
Q
Internal Growth Rate
A
- tells us how much the firm can grow assets using retained earnings as the only source of financing, without any additional external funds
6
Q
The Sustainable Growth Rate
A
- tells us how much the firm can grow by using internally generated funds (retained earnings) and by issuing new debt to maintain a constant debt/equity ratio
7
Q
Recall DuPont Identity for ROE
A
- profit margin: operating efficiency
- total asset turnover: asset use efficiency
- financial policy - choice of optimal debt/equity ratio
- dividend policy - choice of how much to pay to shareholders versus reinvesting in the firm
8
Q
Cash Budget
A
- use monthly receipts and disbursements, and required cash balances to determine short-term borrowing needs
9
Q
Solvency
BALANCE SHEET
A
- refers to firm’s long-term financial health
- concerned with entire balance sheet
- total assets vs total liabilities
- measured by ?
10
Q
Liquidity
A
- refers to firm’s ability to meet its short-term obligations
- concerned primarily with current assets and current liabilities (working capital), and cash flow generation
11
Q
Liquidity of an Asset
A
- refers to how quickly an asset can be converted into cash, without giving up value
