Corporate Finance chapter 26 Corporate Financial Models and Long-Term Planning.doc

Corporate Finance Ross ?? Westerfield ?? Jaffe
Sixth Edition
26
Chapter Twenty Six
Corporate Financial Models and Long-Term Planning
Prepared by
Gady Jacoby
University of Manitoba
and
Sebouh Aintablian
American University of Beirut
Chapter Outline
261>.1 What is Corporate Financial Planning?
A Financial Planning Model: The Ingredients
What Determines Growth?
Some Caveats of Financial Planning Models
Summary & Conclusions
What is Corporate Financial Planning?
It formulates the method by which financial goals are to be achieved.
There are two dimensions:
A Time Frame
Short run is probably anything less than a year.
Long run is anything over that; usually taken to be a two-year to five-year period.
A Level of Aggregation
Each division and operational unit should have a plan.
As the capital-budgeting analyses of each of the firm’s divisions are added up, the firm aggregates these small projects as a big project.
What is Corporate Financial Planning?
Scenario Analysis
Each division might be asked to prepare three different plans for the near term future:
A Worst Case: making the worst possible assumptions about pany’s products and the state of economy
A Normal Case: making most likely assumptions about pany and the economy
A Best Case: each division would be required to work out a case based on the most optimistic assumptions.
What Will the Planning Process plish?
Interactions
The plan must make explicit the linkages between investment proposals and the firm’s financing choices.
Options
The plan provides an opportunity for the firm to weigh its various options.
Feasibility
The different plans must fit into the overall corporate objective of maximizing shareholder wealth.
Avoiding Surprises
Nobody plans to fail, but many fail to plan.
A Financial Planning Model: The Ingredients
Sales forecast
Pro forma statements
Asset requirements
Financial requirements
Plug
Economic assumptions
Sale