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Corporate Finance (Fach) / Long Term Financial Planning (Lektion)
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- What is the purpose of financial planning? establishing scenarios and estimating their consequences show interaction between investment proposals and difference of financing methods present contribution of the plan to archieve an overall objective
- Steps of longterm financial planning Financial Statement forecast implications of general growth? sales forecast no exact prediction possible!! ↓ Estimation of financial needs identification of required capital planning investments and usage of "Net Working Capital" ↓ Capital availibility estimation of internal/external funds financial restrictions? ↓ Planning adjustments new forecast ↓ Economical assumptions What economical developement? Further assumptions? ↓ Control and performance payment target performance difference review of capital usage payments of managers linked to fullfillment of targets
- Procedure of POS Identifying the funds which must be raised is one of the key outputs of the forecasting process. This amount is known as the External Financing Needed (EFN) or Additional Funds needed (AFN) sales forecast and requirements regarding assets/external capital income statement projection balance sheet projection calculation of external financial need (= EFN)
- Calculation of External Financial Need = (Assets / Sales) x ▴Sales → required increase in assets - (Liabilities / Sales) x Sales → "spontaneous" increase in liabilities - PM x Salesforecast x (1-p) → "spontaneous" increase in retained earnings (expected earnings) Profit Margin / Retention Ratio are constant spontaneous means through normal business activities p = Payout Ratio (1-p) = Retention Ratio
- Capital Needs How to raise? bank loan corporate bonds additional shares depends on target capital structure market conditions exisiting credit restrictins rating board of directors financial feedback consideration of interest and dividends
- Growth Analysis Objective = maximation of shareholder value high sales = shareholder value maximation?? growing sales should lead to growing earnings investing in negative NPV = increase sales but not shareholder value = growth rate should be not the target itself, it should be the consequence of maximazing shareholder value principles
- SGR - Formula = Substainable growth rate of sales ▲Sales/ S(o) = PM(1-P)(1+L) / T-PM(1-P)(1+L) PM = Profit Margin = Net Income / Sales S(o) = Sales in 0 (1-p) = Retention Ratio T = Assets(o) / Sales(o)
- Calculation of Growth Rate = Retention Ratio x Return on Equity g = ROE x (1-p) NI (1) / E (0)
- SGR Formula 2 g = ROE * (1-p) Equity aus dem VORJAHR!!
- POS Definition POS is a financial forecasting approach which is based on the premise that items on the financial statement vary with sales Assumptions All assets and accounts payable grow (proportionally) with sales Profit Margin and the Retention Ratio are constant Financing accounts are constant (bonds, stocks, etc.) Further assumptions (depreciation etc. are case specific)
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- SGR maximization of shareholder value Idea: Growing sales lead to growing earnings
- Steady state growth for terminal value and Problems Finding valid expressions for terminal value calculations in company valuation Problem: Cash flow forecasts for infinite horizons would be required but in practice they cannot be forecasted accurately Approach: Implementation of a 2-stage model Problems: Unrealistic (implicit) return assumptions Mismatch of growth rate and payoff ratio Overthelong-run,its eems more reasonable to assume that returns will converge to industry averages.