CHAPTER 6: FINANCIAL PLANNING AND 13) EXCESS CAPACITY ADJUSTMENTS – changes

FORECASTING made to the existing asset forecast because the

1) MISSION STATEMENT – a condensed version of
a firm’s strategic plan.
2) CORPORATE SCOPE – defines a firm’s lines of
business and geographic areas of operation.
firm is not operating at full capacity.
14) FORECASTED FINANCIAL STATEMENTS –
financial statements that project the company’s
financial position and performance over a period of
years.

3) STATEMENT OF CORPORATE OBJECTIVES – 15) REGRESSION ANALYSIS – a statistical

sets forth specific goals to guide management. technique that fits a line to observed data points so
that the resulting equation can be used to forecast
4) CORPORATE STRATEGIES – broad approaches other data points.
developed for achieving a firm’s goals.

5) OPERATING PLAN – Provides management

detailed implementation guidance, based on the FORMULAS:
corporate strategy, to help meet the corporate
objectives. ADDITIONAL FUNDS NEEDED

6) FINANCIAL PLAN - the document that includes Projected Spontaneous Increase in

assumptions, projected financial statements, and AFN= asset - liabilities - retained
increase increase earnings
projected ratios and ties the entire planning
process together. AFN= (A0*/S0) ΔS – (L0*/S0) ΔS – MS1 (1-Payout)

7) SPONTANEOUSLY GENERATED FUNDS -

funds that arise out of normal business operations
Actual Sales
from its suppliers, employees, and the government Full Capacity Sales=
Percentage of capacity at which fixed
(such as accounts payable and accrued wages and assets were operated
taxes) that reduce the firm’s need for external
financing.

8) RETENTION RATIO – it is the proportion of net Target fixed assets = Actual Fixed Assets
income that is reinvested in the firm, and is Sales Full Capacity Sales
calculated as 1 minus the dividend payout ratio.

9) ADDITIONAL FUNDS NEEDED (AFN) – The

Required level of = Target Fixed Assets Projected
amount of external capital (interest-bearing debt Sales Sales
Fixed Assets
and preferred and common stock) that will be
necessary to acquire the required assets.

10) AFN EQUATION – an equation that shows the

relationship of external funds needed by a firm to
its projected increase in assets, the spontaneous
increase in liabilities, and its increase in retained
earnings.

11) SUSTAINABLE GROWTH RATE – the maximum

achievable growth rate without the firm having to
raise external funds. In other words, it is the growth
rate at which the firm’s AFN equals zero.

12) CAPITAL INTENSITY RATIO – The ratio of assets

required per dollar of sales. (A*/S)