Basic fundamental about Financial Market

1. 1
CHAPTER 12
Financial Planning and
Forecasting

2. 2
Topics in Chapter
 Financial planning
 Additional funds needed (AFN) equation
 Forecasted financial statements
 Sales forecasts
 Operating input data
 Financial policy issues
 Changing ratios

3. Free cash flow
(FCF)
Weighted average
cost of capital
(WACC)
Projected
income
statements
Projected
balance
sheets
Intrinsic Value: Financial Forecasting
Projected
additional
financing
needed (AFN)
Forecasting:
Operating
assumptions
Forecasting:
Financial policy
assumptions

4. 4
Elements of Strategic Plans
 Mission statement
 Corporate scope
 Statement of corporate objectives
 Corporate strategies
 Operating plan
 Financial plan

5. 5
Financial Planning Process
 Forecast financial statements under
alternative operating plans.
 Determine amount of capital needed to
support the plan.
 Forecast the funds that will be
generated internally and identify
sources from which required external
capital can be raised.

6. 6
Financial Planning Process
(Continued)
 Establish a performance-based
management compensation system that
rewards employees for creating
shareholder wealth.
 Management must monitor operations
after implementing the plan to spot any
deviations and then take corrective
actions.

7. Pro Forma Financial
Statements
 Three important uses:
 Forecast the amount of external financing
that will be required
 Evaluate the impact that changes in the
operating plan have on the value of the
firm
 Set appropriate targets for compensation
plans

8. Steps in Financial Forecasting
 Forecast sales
 Project the assets needed to support
sales
 Project internally generated funds
 Project outside funds needed
 Decide how to raise funds
 See effects of plan on ratios and stock
price

9. Comparison (Continued)
 Profitability ratios lower because of
higher interest expense.
 Lower asset management ratios due to
high levels of receivables and inventory.
 Higher leverage than industry.
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10. 10
AFN Key Factors (Continued)
 Profit margin (Net income/Sales): The
higher the profit margin, the smaller
AFN will be other things held constant.
 Payout ratio : The lower the payout
ratio, the smaller AFN will be other
things held constant.

11. Compensation and
Forecasting
 Forecasting models can be used to set
targets for compensation plans.
 The key is to rewards employees for
creating shareholder intrinsic
shareholder value.
 The emphasis should be on the long
run rather than short-run performance.

12. Financing Feedbacks
 Forecast does not include additional interest
from the line of credit because we assumed
that the line was tapped only on the last day
of the year.
 It would be more realistic to assume that the
line is drawn upon throughout the year.
 Financing feedbacks occur when the
additional financing costs of new external
capital are included in the analysis.
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13. Modifying the Forecasting
Model
 Can maintain target capital structure
each year by modifying model to
issue/retire long term debt or
issue/repurchase shares of stock.

14. THANK YOU
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