Professional Documents
Culture Documents
Chapter 15
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The firm has only common stock equity (E ) and will issue no new shares of common stock next year. The firms total asset turnover ratio, S/A, remains constant. The firm pays out a constant fraction, d, of its earnings as dividends. The firm maintains a constant assets-to-equity ratio, A/E. The firms net profit margin, m, is constant.
A m1 d E A A m1 d S E
The model gives managers a kind of shorthand projection that ties together growth objectives and financing needs.
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For Yahoo! this meant that the company could increase sales by 28.3% without issuing new shares of common stock and without changing asset turnover, dividend policy, profit margins, or leverage.
percentage-ofsales method
Plug figure
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Zinsmeister plans to increase sales by 30% in 2010. The companys gross profit margin will remain at 35%.
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The company plans to increase cash holdings by $1 million next year. Accounts receivable equal 8.5% of sales. Inventories equal 10% of sales. Accounts payable equal 12% of cost of goods sold. The company will repay an additional $5 million in long-term debt in 2010. The company will pay out 50% of its net income as a cash dividend. The company plans to use its credit line as the plug figure.
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A AP EFR S S mS (1 g )(1 d ) S S
EFR for Zinsmeister is $8,111,000. In pro forma balance sheet, external financing declined by $6.7 million. Why the discrepancy?
The discrepancy arises because the assets to sales ratio is actually not constant, as the equation assumes.
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Aggressive strategy
Matching strategy
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Wages and salaries: The firms wages and salaries equal 10% of monthly sales plus $30,000.
Tax payments: Taxes of $75,000 must be paid in December. Fixed asset outlays: New machinery costing $390,000 will be purchased and paid for in November. Interest payments: $30,000 is due in December. Cash dividend payments: $60,000 will be paid in October. Principal payments: $60,000 is due in December.
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Subtract the desired minimum cash balance from the ending cash balance
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Cash Budget
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Cash Budget
The monthly financial activities are as follows: Oct: Invest $28,000 of excess cash. Nov: Liquidate $28,000 of excess cash and borrow $226,000. Dec: Repay $145,000 of amount borrowed.
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Financial Planning
Strategic financial plans act as guides for preparing operating financial plans. Sustainable growth model is a tool that managers can use to determine the feasibility of a target growth rate under certain conditions. Pro forma financial statements are projected financial statements.