1.
, A*/S0: Increases asset requirements, increases AFN.: Higher capital intensity ratio
2.
(A/S0)∆S - (L/S0)∆S - M(S1)(RR): AFN
3.
assets required to support sales; called capital intensity ratio.: A*/S0
4.
assumes a constant profit margin: Equation method
5.
Costs
Cash
Accounts receivable: Forecast some items as a percent of the forecasted sales
6.
Debt at end of year
Debt at beginning of year
Average of beginning and ending debt: approximate interest expense
7.
Decreases spontaneous liabilities, increases AFN: Pay suppliers sooner
8.
Easy to implement
Reasonably accurate: Base interest expense on beginning debt, but use a slightly higher interest rate
9.
Forecast sales
Project the assets needed to support sales
Project internally generated funds
Project outside funds needed
Decide how to raise funds
See effects of plan on ratios and stock price: steps in financial forecasting
10.
if debt is added smoothly throughout the year.
But has problem of circularity.: accurately estimate the interest payments
11.
if debt is added throughout the year instead of all on December 31. But doesn't cause problem of circularity: under-estimate interest expense
12.
if debt is added throughout the year instead of all on January 1. Causes circularity called financial feedback: over-estimate interest expense
13.
increase in sales: ∆S
14.
Increases asset requirements, increases AFN.: Higher sales
15.
Increases funds available internally, decreases AFN.: Higher profit margin
16.
Inventories
Net fixed assets
Accounts payable and accruals: Items as percent of sales
17.
is actually based on the daily balance of debt during the year.: Interest expense
18.
is more flexible. More important, it allows different items to grow at different rates.: Pro forma method
19.
leads to large periodic AFN requirements, recurring excess capacity.: Lumpy assets
20.
leads to less-than-proportional asset increases: Economies of scale
21.
lowers AFN: Excess capacity
22.
more debt causes more interest, which reduces net income, which reduces retained earnings, which causes more debt, etc.: financial feedback
23.
profit margin (Net income/sales): M
24.
Project sales based on forecasted growth rate in sales: forecasted financial statements method
25.
Reduces funds available internally, increases AFN.: Higher dividend payout ratio
26.
Required assets minus specified sources of financing: Additional funds needed (AFN) is
27.
Required assets to support sales
Specified sources of financing: Given the previous assumptions and choices, we can estimate
28.
retention ratio; percent of net income not paid as dividend: RR
29.
spontaneous liabilities ratio: L*/S0
30.
then you have more financing than is needed.
Pay off debt.
Buy back stock.
Buy short-term investments.: If AFN is negative
31.
then you must secure additional financing.: If AFN is positive
32.
Three important uses:
Forecast the amount of external financing that will be required
Evaluate the impact that changes in the operating plan have on the value of the firm
Set appropriate targets for compensation plans: financial planning and pro forma statements
