...capital expenditures for plant assets and others. It also involves risk management. Proper financial planning gives the company guidance on how to proceed with expenses and funds. Better financial planning leads to proper prioritizing of goals and work towards long-term goals. Financial planning involves strategic plan which includes the plan that supports the mission, vision and values of the organization. Operating plans which includes a detailed guidance to help organizations realize its strategic vision. Financial Plan which involve the forecasting of financial statements, the amount of money that supports the plan, forecasting of funds, performance-based management system, and the monitoring of operations after executing the plan to check any nonconformities and take actions towards it. (Ehrhardt and Brigham, 2011). Financial planning helps the companies minimize costs and maximize profits. One method of financial planning is the Additional Fund Needed (AFN) method. Additional Fund Needed (AFN) method is used when the company is looking into expanding its operations. The company must have some blueprint to come up with money to fund the resources, buildings or assets to increase profits. The Additional Fund Method (AFN) method is known for forecasting and estimating additional funds requirement (Brigham, 1992). Many...
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...Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm. __T__ 5. As a firm's sales grow, its current assets also tend to increase. For instance, as sales increase, the firm's inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneously generated funds arise from transactions brought on by sales increases. __T__ 6. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin. __F_ 7. A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset. ((( Increase in liabilities to suppliers) __F__ 8. If a firm wants to maintain its ratios at their existing levels, then if it has a positive sales growth rate of any amount, it will require some amount of external funding. _ F 9. To determine the amount of additional funds needed (AFN), you may subtract the expected increase in liabilities, which represents a source of funds, from the sum of the expected increases in retained earnings and assets, both of which are uses of...
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...trends and events as well as on forecasts of economic prospects. a. True b. False 2. Errors in the sales forecast can be offset by similar errors in costs and income forecasts. Thus, as long as the errors are not large, sales forecast accuracy is not critical to the firm. a. True b. False 3. As a firm's sales grow its current asset accounts tend to increase. For instance, as sales increase the firm's inventories increase and its level of accounts payable will increase. Thus, spontaneously generated funds will arise from transaction accounts that increase as sales increase. a. True b. False 4. The term "spontaneously generated funds" generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin. a. True b. False 5. An increase in the firm's inventory balance will normally require additional financing unless the increase is matched by an equally large decrease in some other asset account. a. True b. False 6. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. a. True b. False 7. Pro forma financial statements, as discussed in the text, are used primarily to assess a firm's historical performance. a. True b. False 8. The first, and most critical, step in constructing...
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...increase, which requires certain financial forecasting. Our consulting company was hired by John Grady of Expert Systems, Inc. to create a detailed financial forecast for year of 1966. This financial forecast is necessary for the company’s five year plan and budget to be discussed during their upcoming company executive retreat. Part of this forecast includes creating pro-forma financial statements. Pro-forma financial statements display the different events projected and assumed for the future. They include a balance sheet, an income statement, and a statement of cash flows. In this forecast we come up with reasonable inputs and assumptions for the financial forecast, use and explain the percentage of sales method, evaluate the additional funds needed (AFN), and review the financial implications of different operating plans under different operating conditions. 100% Capacity One of the best ways to develop pro-forma financial statements is to use the percentage-of-sales method. This method allows you to increase the current asset and current liability accounts by the percentage amount you are expecting your sales to increase....
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...Assignment 4.2 Abstract The State of Nebraska has a biennium budget that is set from 2013 all the way to 2015. Knowing what is in your budget and how to properly gauge what will be needed for the coming two years in each department is an important aspect to a successful budget. The person in charge of the budget for each department needs to know how to properly budget and respond to the needs of the state in the most fiscal way possible. A budget is only as good as the person who is running it. The Nebraska State budget is complex, but with the right amount of team work and dedication, it seems to run very smoothly. Nebraska State Budget The Nebraska State budget is set on a biennium basis. Since this is the case the budget will need to be looked at for the next two years. The thing to keep in mind is the total “Budgeted Amount” for the Budget Status Report should reflect all “new” appropriations authorized by the Legislature for fiscal year 2013-14 as well as any appropriations from fiscal year 2012-13 that will carry over to the current budget. Having a Budget Status Report satisfies the requirement to provide an estimate of fiscal year expenditures. The Nebraska State Budget should be conducted in a responsible manner that reflects the most efficient use of the state’s money (NCSL, 2013). Budget Information The State of Nebraska’s budget is done on a biennium basis. The Governor’s budget recommendations play an important role in the budget making process. The...
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...reduce its inventory on hand (in components, work in process and finished goods), accounts payable, and sunk labor costs thus reducing its working capital. By reducing those costs, Dell freed up funds not necessary to run the day-to-day business for other purposes such as expansion or investment. Those funds could also be used to ease/speed purchasing from suppliers as new technology, such as the Pentium chip, developed. Dell’s competitors, meanwhile, repetitively built several lines of stock computers in advance of any customer being identified, let alone committing to buy. As they compiled ever-aging/obsolescing inventory, labor costs, and accounts payable costs, in anticipation of customers that may or may not actually ever present to the company to make a purchase, Dell’s competitors tied up significant funds in working capital. By committing those funds, Dell’s competitors were prevented from using that cash for other purposes. Additionally, as technology improved, these firms were slowed from incorporating the new technology into their products due both to a lack of cash and an inventory of out-of-date products that could not be effectively sold along-side the faster, newer models. 2. How did Dell fund its 52% growth in 1996? Dell appears to have been able to fund its growth internally. To meet the increase in demand, Dell would have to increase its operating assets from their 1995 level of $1100 million. At the close of 1995, its operating asset to...
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... The forecast for many items will be based on sales, and any additional funds needed will be obtained as notes payable. a. Assuming the historical trend continues, what will sales be in 2010? Base your forecast on a spreadsheet regression analysis of the 2004-2009 sales data above, and include the summary output of the regression in your answer. By what percentage are sales predicted to increase in 2010 over 2009? Is the sales growth rate increasing or decreasing? Here are the company's historical sales. Hint: Use the Trend function to forecast sales for 2010. Year Sales Growth Rate 2004 129,215,000 2005 180,901,000 40.0% 2006 235,252,000 30.0% 2007 294,065,000 25.0% 2008 396,692,000 34.9% 2009 455,150,000 14.7% 2010 515,465,267 % Increase in Predicted Sales for 2010 over 2009: 2009 Sales 455,150,000 2010 Sales 515,465,267 % increase 13.25% Note: This growth rate has been declining over time. b. Cumberland’s management believes that the firm will actually experience a 20 percent increase in sales during 2010. Construct 2010 pro forma financial statements. Cumberland will not issue any new stock or long-term bonds. Assume Cumberland will carry forward its current amounts of short-term investments and notes payable, prior to calculating AFN. Assume that any Additional Funds Needed (AFN) will be raised as notes payable (if AFN is negative, Cumberland will purchase additional short-term investments). Use an interest rate of 9 percent for...
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...systems include stock exchanges, investment banks, and government departments. Physically the systems are hosted all over the world, though they tend to be concentrated in financial centres like London, New York, and Hong Kong. Capital markets are defined as markets in which money is provided for periods longer than a year.[3] A key division within the capital markets is between the primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. The main entities seeking to raise long-term funds on the primary capital markets are governments (which may be municipal, local or national) and business enterprises (companies). Governments tend to issue only bonds, whereas companies often issue either equity or bonds. The main entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks trading on their own...
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...Financing New Ventures In Chapter 5, we learned about evaluating financial performance. We can evaluate performance by looking at financial ratios and conducting different forms of analyses. Some useful analyses are trend analysis, cross-sectional analysis, and industry comparables analysis. Trend analysis is used to examine a venture’s performance over time. Cross-sectional analysis is used to compare a venture’s performance compared to another company at the same point in time. Industry comparables analysis is used to compare a venture’s performance against the average company’s performance in the same industry. Next, we looked at MPC income statements and balance sheets. A major part of MPC is cash burn. Cash burn is the cash a venture expends on its operating and financing expenses, as well as its investments in assets. Another important part of MPC is cash build, which is equal to the (net sales – change in receivables). In order to find the net cash burn, you must subtract the cash build from the cash burn. Liquidity ratios, which indicate the ability to pay short-term liabilities when they come due, is also an important aspect. Another evaluation tool is the conversion period ratio. This ratio indicates the average time it takes in days to convert current assets and current liability accounts into cash. The operating cycle and the cash conversion cycle also play a part in the evaluation. There are also different types of conversion periods. They...
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...to $6 million in 2011.Its assets totaled $3 million at the end of 2010.Baxter is already at full capacity, so its assets must grow at the same rate as projected sales. At the end of 2010, current liabilities were $1 million, consisting of $250,000 of accounts payable and $250,000 accruals. The after-tax profit margin is forecasted to be 5%, and the forecasted payout ratio is 70% Use the AFN equation to forecast Baxter’s additional funds needed for the coming year. The AFN equation is AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(1 - d) Where A* = Total Assets = 3,000,000 S0 = current sales = 5,000,000 ΔS = change in sales = 1,000,000 L* = spontaneous liabilities = accounts payable + accruals = 500,000 M = Profit margin = 5% S1 = sales next year = 6,000,000 d = dividend payout ratio = 70% AFN =(3,000,000/5,00000)X1,000,000 – (500,000/5,000,000) X 1,000,000 – 5%X6,000,000X(1-0.7) = (0.6)($1,000,000) - (0.1)($1,000,000) - ($300,000)(0.3) = $600,000 - $100,000 - $90,000 = $410,000. (12-2) Refer to Problem 12-1. What would be the additional funds needed if the company’s year end 2010 assets had been $4 million? Assume that all other numbers, including sales, are the same as in Problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company’s “capital intensityâ€? ratio the same or different? Using the same equation with assets of $4,000,000 we get AFN = (A*/S0)ΔS - (L*/S0)ΔS - MS1(1...
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...INSTRUCTOR’S RESOURCES Overview This chapter introduces the fundamentals and describes the interrelationship of net working capital, profitability, and risk in managing the firm's current asset accounts. The chapter then focuses on the management of three major current asset accounts⎯cash, accounts receivable and inventory. A brief discussion of general inventory management policies, international inventory management, and several specific inventory management techniques: ABC, economic order quantity (EOQ), reorder point, materials requirement planning (MRP), and just-in-time (JIT). The key aspects of accounts receivable management are discussed: credit policy, credit terms, and collection policy. The chapter also discusses the additional risk factors involved in managing international accounts receivable. Examples demonstrate the effect of changes in credit policy. Also discussed is the impact of changes in cash discounts PMF DISK This chapter's topics are not covered on the PMF Tutor or the PMF Problem-Solver. PMF Templates The following spreadsheet templates are provided: Problem 14-1 14-6 Topic Cash conversion cycle EOQ, reorder point, and safety stock 373 Part 5 Short-Term Financial Decisions Study Guide The following Study Guide examples are suggested for classroom presentation: Example 2 4 7 Topic Aggressive versus conservative...
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...Liquidate the Company This is probably not in the best interest of any party. Debt holders only receive 55·7c for every $1 invested and the shareholders receive nothing (see appendix, proposal 1). Furthermore, the parts division is continuing to make a profit and should possibly continue. The Board may want to consider closing just the fridge division, and focusing on the parts manufacturing division, with the possibility of pursuing the option of the mobile refrigeration business. However, in this case, the problem of the lack of funding might continue. 2. Corporate Restructuring and Management Buy-Out Shareholders The shareholders would benefit from either proposal two or three, as opposed to the first proposal, as they stand to gain some funds. The restructuring proposal requires them to pay $40m cash for new shares but lose their control of the company (the shareholding falls to just under 13%). On the other hand the statement of financial position looks robust with a $20m cash float and bank overdraft facilities probably available at previous levels (see appendix, proposal 2). This may make the company more successful in the future, as directors are less restricted by covenants. The value at $256·3m currently only gives existing shareholders a share (or stake) of about $33·3m (13% x $256·3m), which is less than the amount they...
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...of A/c payable each year will equal to 5% of cost of good sold. 15. Land will not be depreciated or valued. 16. Building will be depreciated at 5 % annually and capital expenditure on building will equal the total amount of depreciation. 17. Investment in Plant and Machinery will equal to 15 % of sales in year 2-4 and onward investment in plant & Machinery will be 8 % of sales forever. 18. Depreciation of Plant and Machinery will takes place at 20% of its beginning value each year. 19. Motor vehicle will be depreciated at 20% each year for 5 Years (book value) and are planned to be replaced at the end of 5th year and at a cost of 4.5 million. 20. The company will follow residual dividend policy where additional funds needed for growth will be first finance provided through retained earnings and any remaining profit will be distributed to share holders as dividend....
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...MBA Financial Management and Markets Exam 1 Spring 2009 The following questions are designed to test your knowledge of the fundamental concepts of financial management structure [chapter 1], financial valuation [chapter 2], financial statements and tax planning [chapter 3], and short-term financial forecasting and financing [chapter 14]. Choose the best possible answer to the questions given. Each question is equally weighted. Papers are due 2/26/09 at the beginning of class. True/False Indicate whether the statement is true or false. ____ 1. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size. 2. One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance. 3. Suppose an investor plans to invest a given sum of money. She can earn an effective annual rate of 5% on Security A, while Security B will provide an effective annual rate of 12%. Within 11 years' time, the compounded value of Security B will be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding...
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...such as a stock is traded. Taking into account real options can greatly affect the valuation of potential investments. It does not obligate the owner to take any action, it just gives the right to buy or sell an asset. Examples of real options include developing new products expanding an existing product line, entry to a new geographical area as well as abandoning certain operations. There are several tools and techniques that are available for managers to analyze the profitability of a project. There is the discounted cash flows method which would ignore the option and calculate the net present value. There is a qualitative assessment that shows the value of the option increases is the project is risky or there is a long time that is needed to wait before exercising the option. The decision tree analysis is a tree like model that shows probable outcomes of the different decisions. Using the existing model for corresponding financial options, this resembles a financial call option. It is basically a call option with an expiration date . The final method is financial engineering techniques which use tools and knowledge from the fields of computer science, statistics, economics and applied mathematics to address current financial issues as well as to devise new and innovative financial products. Question #2: There are various methods and steps in financial forecasting and planning. If I were running a company I would perform...
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