Chapter 29 Principles of Corporate Finance Tenth Edition Financial Planning Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill.

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Presentation transcript:

Chapter 29 Principles of Corporate Finance Tenth Edition Financial Planning Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

29-2 Topics Covered  Links Between Long-Term and Short-Term Financing Decisions  Tracing Changes in Cash  Cash Budgeting  Short-Term Financing Plan  Long-Term Financing Plan  Growth and External Financing

29-3 Firm’s Cumulative Capital Requirement Lines A, B, and C show alternative amounts of long-term finance. Strategy A: A permanent cash surplus Strategy B: Short-term lender for part of year and borrower for remainder Strategy C: A permanent short-term borrower A B C Year 2Year 1 Dollars Cumulative capital requirement Time

29-4 Cash Budgeting Example Dynamic cash budget

29-5 A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan continued

29-6 A Short Term Financing Plan Example - Dynamic Mattress Company- Financing Plan

29-7 Financial Planning Planning Horizon - Time horizon for a financial plan. Departments are often asked to submit 3 alternatives –Optimistic case = best case –Expected case = normal growth –Pessimistic case = retrenchment  Financial plans help managers ensure that their financial strategies are consistent with their capital budgets. They highlight the financial decisions necessary to support the firm’s production and investment goals.

29-8 Financial Planning Why Build Financial Plans?  Contingency planning  Considering options  Forcing consistency

29-9 Financial Planning Steps Inputs Outputs Outputs - Projected financial statements (pro forma). Financial ratios. Sources and uses of funds. Planning Model Planning Model - Equations specifying key relationships. Inputs - Current financial statements. Forecasts of key variables (such as sales or interest rates).

29-10 Dynamic Mattress Financial Plan Condensed year-end balance sheets for 2009 and 2008 for Dynamic Mattress Company (figures in $ millions).

29-11 Dynamic Mattress Financial Plan Latest and forecasted operating cash flows for Dynamic Mattress Company (figures in $ millions).

29-12 Dynamic Mattress Financial Plan Latest and forecasted amounts of external capital required for Dynamic Mattress Company (figures in $ millions).

29-13 Dynamic Mattress Financial Plan Latest and pro forma balance sheets for Dynamic Mattress Company (figures in $ millions).