1. 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.

2. 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

3. 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

4. 29-4 Cash Budgeting Example Dynamic cash budget

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

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

7. 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.

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

9. 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).

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

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

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

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