FIN 300 Chapter Notes - Chapter 4: Asset Turnover, Profit Margin, Dividend Payout Ratio
28 Jun 2018
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FIN – Chapter 4 – Long-Term Financial Planning and Growth
Planning horizon – the long-range time period on which the financial planning process focuses
(usually the next 2-5 years)
Aggregation – the process by which smaller investment proposals of each of a firm’s
operational units are added up and treated as one big project
Financial planning process require to prepare three alternative business plans for the next three
years: Worst case, normal case, best case
What does planning accomplish
Making sure any new ventures, investments or projects can be financed for
Allows the firm to develop, analyze and compare different scenarios
Identifies what may happen to the firm if different events take place
Ensuring feasibility and internal consistency
Planning Model Ingredients
Sales Forecast
oUser of the planning model will supply this value (driver)
Pro Forma Statements
oForecast balance sheet, income statement, and statement of cash flows
Asset Requirements
oProjected capital spending
Financial Requirements
oNecessary financing arrangements, dividend and debt policies
The plug
oSome amount of new financing will often be necessary because projected total
assets will exceed projected total liabilities and equity
Economic assumptions
oThe plan will have to state explicitly the economic environment in which the firm
expects to reside over the life of the plan
Percentage of sales approach – a financial planning method in which accounts are varied
depending on a firms predicted sales level
Goal is to develop a quick and practical way of generating pro forma statements
Income statement
Dividend payout ratio – the amount of cash paid out to shareholders divided by net income
Dividend payout ratio = cash dividends / net income
Can also calculate the ratio of the addition to retained earning to net income
oAddition to retained earnings / net income
Retention ratio – the addition to retained earning divided by net income, also called plowback
ratio
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