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MFIN 8807 (1)
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Finance Final Study Guide.docx

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MFIN 8807
Mike Rush

Christine ZaccaroFinance Rush Chapter 17 Payout PolicyStock Dividends and Stock Splits Distributions of additional shares to a firms stockholdersThe shareholder is given a fixed number of new shares for each one held ie in a twoforone stock split each investor would receive one additional share for each share already heldThe investor ends up with two shares rather than oneThe announcement of a stock split does result in a rise in the market price of the stock even though investors are aware that the companys business is not affectedManagers aim for smooth dividends and increase dividends gradually as earnings grow Chapter 18 LongTerm Financial PlanningPercentage of Sales Models Planning model in which sales forecasts are the driving variable and most other variables are proportional to sales Balancing Item Variable that adjusts to maintain the consistency of a financial plan right hand of balance sheet increases and both debt and equity increases in the same proportion Also called a plugFinancial models ensure consistency between growth assumptions and financing plans but they do not identify the best financing plan Pro Forma Stages1Calculations show what would happen if the size of the firm increases along with projected sales but at this preliminary stage the plan does not specify a particular mix of new security issues2The firm must decide on the financing mix that best meets its needs for additional fundsPercentages of sales models are useful first approximations but in reality assets may not be proportional to sales Financial planners are concerned about unlikely events as well as likely ones External FinancingGrowth Financial models help managers trace through the financial consequences of their growth plans and avoid such disastersReinvested External FinancingNet AssetsSales x Increase in SalesReinvested Earnings Required External FinancingNew InvestmentReinvested EarningsGrowth Rate x AssetsReinvested EarningsThis equation highlights that the amount of external financing depends on the firms projected growththe faster the firm grows the more it needs to invest and therefore the more it needs to raise new capitalAt low growth rates the firm generates more funds than necessary for expansion When growth is zero no funds are needed for expansion For high rates of growth the firm must issue new securities to pay for new investmentsInternal Growth Rate Maximum rate of growth without external financing Internal Growth RateReinvested EarningsAssetsIGRPlowback x ROE NIShareholders Equity x EquityAssetsA firm with a high volume of reinvested earnings relative to its assets can generate a higher growth rate without needing to raise more capitalA firm can achieve a higher growth rate without raising external capital ifoIt plows back a high proportion of its earningsoIt has a high return on equity oIt has a low debttoasset ratioSustainable Growth Rate Steady rate at which a firm can grow without changing leverage plowback ratio x return on equityIt is the highest growth rate the firm can maintain without increasing its financial leverage Sustainable Growth RagePlowback ratio x ROE SummaryThe tangible product of the planning process is a financial plan describing the firms financial strategy and projecting its future consequences by means of pro forma balance sheets income statements and statements of sources and uses of funds Planners also have to think about the unlikelyFinancial planning proceeds by trial and error Percentage of sales models in which many key variables are assumed to be directly proportional to sales not much finance to planning modelsprimary purpose is to produce accounting statementsHigher growth rates will lead to greater need for investments in fixed assets and working capitalIGR is the max rate at which the firm can grow if it relies entirely on reinvested profits to finance its growth that it the maximum rate of growth without requiring external financing SGR is the rate at which the firm can grow without changing its leverage ratioChapter 19 ShortTerm Financial PlanningST Financial PlanLT Financial PlanTotal Capital Requirement When longterm financing does not cover the total capital requirements the firm must raise shortterm capital to make up the differenceWhen longterm financing more than covers the total capital requirement the firm has surplus cash available for shortterm investmentThus the difference btw longterm financing raised and the total capital requirement determines whether the firm is a shortterm borrower or lender 3 Approaches to LongTerm FinancingRelaxedCash surplus lenderMiddleSome financial slackRestrictiveProfit focus ST borrower BalanceHow to Set needs1Match Maturities2Fund LongTerm if possible based on cycle analysis Fund some working capital permanently 3If slack liquidity decisionpay billstaxes pay down shortterm debtHaving a larger reservoir of cash helps fun possible investment needs Holdings of marketable securities are at best zeroNPV investment for a taxpaying firm Working Capital Shortterm or current assets and liabilities such as cash AR inventories and AP
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