Chapter 9 - Corporate Valuation and Financial Planning Fin 365
forecast operating items>forecast debt, equity, and dividends>ensure company has sufficient (but not excess) financing to fund the operating plan
3 steps in projecting financial statements
targeted
WACC is theoretically calculate based on your ____________ capital structure
more
a higher profit margin means that is ______________ net income available to support increases in assets
sales
accounts receivable should be proportional to _____________
external sources like bank loans, equity, long term bonds, etc.
additional funds needed comes from these sources
idendity additional funding required by additional assets due to increase in sales>identify amount of spontaneous assets>identify amount of internal financing available>assume no new external financing
additional funds needed equation method identifies the financing surplus or deficit in these 4 steps:
capital intensity ratio
amount of assets required per dollar of sales companies with relatively high assets to sales ratios require a large number of new assets for any given increase in sales
inventory
as sales increase, firms generally have to carry more ______________
smoothly
basing interest expense on the average amount of debt outstanding during the year implies that debt is added _______________ during the year
financial duress
companies usually only reduce their dividends to reduce the need for external capital when they are experiencing ___________ _________
more
companies with a higher payout ratio need more or less external financing
net property, plant, and equipment
depreciation depends on an asset's depreciable basis, so it's more reasonable to forecast depreciation as a % of ______________________________ rather than sales
dividend policy
determines size and method of cash distributions to shareholders incorporate into financial plan
capital structure
determines targeted mix of debt and equity used to finance the firm, which determines relative mix of distributions to shareholders and payments to debtholders incorporate into financial plan
marginal
discounted cash flow approach uses the expected dividends growth rate of the _____________ investor
more
do people with a higher capital intensity ratio need more or less external financing
additional funds needed equation
equation that provides ballpark estimate of additional external financing that will be required
economic order quantity (inventories are square root of sales so very large increases in sales require little additional inventory)
example of a nonlinear relatinoship that shows that accounts for assets, spontaneous liabilities, and operating costs are not always proportional to sales
amoun of ash flows generated from operating capital will be less than that amount invested in operating capital
explain cash flows if ROIC is <WACC/(1+g)
some flexibility if you can increase or decrease the amount of dividends you pay, but very little flexibility if you want fixed dividends
explain the flexibility of using net income to finance expansion of assets
sales growth, capital intensity, spontaneous liabilities to sales ratio, profit margin, payout ratio
external financing requirements depend on these 5 key factors that are part of the additional financing needed equation
dividend policy, capital structure
financial plan also has to incorporate the company's ___________ ___________ and ___________ ____________
less detailed
firm's operating plan is usually developed for a 5 year time horizon. Does it becomes more or less detailed after each progressive year?
spontaneous liabilities
first source of expansion funding for funding additional assets
lumpy assets
fixed assets added in large discrete units have a major effect on the ratio of fixed assets to sales and different sales levels and on financial requirements
financial plan
forecasts the additional sources of funds needed to finance the operating plan
nopat-investment in total operating capital
formula for FCF
required increase in assets-spontaneous liabilities income-increase in retained earnings
formula for additional financing needed equation
rs=D1/P0+g
formula for discounted cash flow approach to calculating cost of common equity
actual sales/% of capacity at which fixed assets are operated
formula for full capacity sales
(target fixed assets/sales)projected fixed assets
formula for required level of fixed assets
difference between increase in financing and increase in projected assets
how do you calculate the financing surplus or deficit
interest expense increase due to line of credit>net income decreases because of increased interest expense>internal financing decreases because net income decreases>financing deficit increases because internally generated financing decreases>additional LOC is used to make balance sheet balance>repeat the loop
how does the financing feedback loop work
total net operating working capital
if ROIC is < WACC/(1+g), then the value of operations is less than the
less
if a firm increases their profit margin, do they need more or less external financing
debt at the beginning of the year
if debt is not added until the end of the year, that year's interest expense should be based on what
0
if the self sustaining growth rate is use in the AFN equation, it results in an AFN of
less
if you can lower your capital intensity ratio, then you can achieve a given level of growth with _______________ assets and new external capital
lower (less profitable and less efficient)
if you have a lower NOPAT/Sales ratio or higher capital/sales ratio, your roic may be ______________
large
if you have lumpy assets and you're already operating at full capacity, small projected sales increases would require ___________ increases in capacity
free cash flow
important part of operating plan is forecast of the firm's ________ _____ ______
self supporting growth rate
maximum growth rate the firm could achieve if it had no access to external capital
forecasted financial statements
method of financial planning that forecasts entire financial statements as part of planning process
lines of credit
preliminary financial plan assumes no __________ ___ _________
free cash flow
primary source of a company's value
payout ratio
proportion of income that is distributed as dividends the less income a company distributes as dividends the larger its addition to retained earnings and less need for external capital
operating plan
provides detailed implementation guidance for a firm's operations-logistics, product lines, etc.
balance
realistic projection requires balance sheets to ____________
retail
sales and plant, property, and equipment has a close relationship for ___________ stores
net income/reinvested earnings
second source of funding for expansion of additional assets
identify net additional financing>identify required additional assets>identify resulting financing deficit or surplus>eliminate surplus or deficit
steps in identifying and eliminating the financial deficit or surplus in the projected balance sheets
deficit
there is a financing _________ if additional assets are less than additional financing
surplus
there is a financing _________ if additional financing is greater than additional assets
economies of scale, nonlinear relationships, lumpy asses (and excess capacity)
three different examples og when assumptions of constant ratios and identical growth rates are not always valid
spontaneous liabilities, external financing like new bonds or equity, internal financing like reinvested earnings
three sources of preliminary additional financing
true
true/false both fixed and current assets must increase if sales are to increase
true
true/false if the firm has any positive earnings and pays less than 100% in dividends, then it will have some addition to retained earnings, which can be combined with spontaneous funds to allow the company to grow at some rate without raising external capital
false (they may have one)
true/false in short run, sales and plants property and equipment always have a close relationship
true
true/false rapidly growing companies require large increases in assets and external financing
false
true/false the assumption of constant ratios and identical growth rates of % of sales forecasting methods and the AFN method is always valid
spontaneous liabilities
type of liabilities that grow in proportion to sales
will me meet our goals, what if analysis, anticipate financing needs
what are a couple uses of financing financial statements
improved technology
what can you use to make your inventory/sales ratio decrease
whether to issue stock or debt
what does the financial plan decide on when the fcf is negative
how much fcf to allocate among investors, how much fcf to put in marketable securities (for future needs)
what does the financial plan decide on when the fcf is positive
draw on a line of credit
what is a way that you can handle a financing deficit
pay a special dividend
what is a way that you can handle a financing surplus
accrued taxes and wages
what is an example of spontaneous liabilities
use as much as possible, but little flexibility in their usage (can't just add more when you need to)
what is the main limitation of using spontaneous liabilities
difference between net income and dividends
what is the preliminary amount of internal financing available
operating plan generates the fcf, financial plan decides how to allocate fcf
what is the relationship between operating plan, financial plan, and fcf
economies of scale
when _________ ____ __________ occur, ratios are likely to change over time as the size of the firm increases ex-retailers need to maintain base stocks of different inventory items even if current sales are low AS SALES EXPAND, INVENTORY MAY GROW LESS RAPIDLY THAN SALES SO THE RATIO OF INVENTORY TO SALES DECREASES
financing feedback loop
when additional financing feeds back and causes a need for even more financing
sales
when doing the forecasted financial statement method, spontaneous liabilities increase with
full capacity
when excess capacity exists, sales can grow to the ___________ ___________ sales without increasing fixed assets, but sales beyond that levels require additional fixed assets
growing rapidly
when may a company's fcf be negative (not related to just being a garbage company)
need to increase capacity to increase sales
why is there a close relationship between sales and net PP&E for all companies