784 Part Nine Financial Planning and Working Capital Management
bre44380_ch29_759-786.indd 784 10/06/15 09:53 AM
- Dynamic’s long-term plan Our long-term planning model of Dynamic Mattress is an
example of a top-down planning model. Some firms use a bottom-up financial planning
model, which incorporates forecasts of revenues and costs for particular products, advertising
plans, major investment projects, and so on. What sort of firms would you expect to use each
type, and what would they use them for? - Performance measurement Corporate financial plans are often used as a basis for judging
subsequent performance. What do you think can be learned from such comparisons? What
problems are likely to arise, and how might you cope with these problems? - Long-term planning models The balancing item in the Dynamic long-term planning
model is borrowing. What is meant by balancing item? How would the model change if
dividends were made the balancing item instead? In that case how would you suggest that
planned borrowing be determined? - Dynamic’s long-term plan Construct a new model for Dynamic Mattress based on your
answer to Problem 21. Does your model generate a feasible financial plan for 2016? (Hint: If
it doesn’t, you may have to allow the firm to issue stock.) - Dynamic’s long-term plan
a. Use the Dynamic Mattress model (Tables 29.9 to 29.11) and the spreadsheets to produce pro
forma income statements, balance sheets, and statements of cash flows for 2016 and 2017.
Assume business as usual except that now sales and costs are planned to expand by 30% per
year, as are fixed assets and net working capital. The interest rate is forecasted to remain at
10% and stock issues are ruled out. Dynamic also sticks to its 60% dividend payout ratio.
b. What are the firm’s debt ratio and interest coverage under this plan?
c. Can the company continue to finance expansion by borrowing? - Long-term plans The financial statements of Eagle Sport Supply are shown in Table 29.18.
For simplicity, “Costs” include interest. Assume that Eagle’s assets are proportional to its sales.
a. Find Eagle’s required external funds if it maintains a dividend payout ratio of 60% and
plans a growth rate of 15% in 2018.
b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing
item? What will its value be?
c. Now suppose that the firm plans instead to increase long-term debt only to $1,100 and
does not wish to issue any new shares of stock. Why must the dividend payment now be
the balancing item? What will its value be?
Sales $1,500
Operating costs 1,405
$ 95
Depreciation 10
$ 85
Interest 5
Pretax income $ 80
Tax at 50% 40
Net income $ 40❱ TABLE 29.17^ Income
statement for Dynamic Mattress
for 2014 (figures in $ millions).
See Problem 16.
Notes: Dividend = $30.
Retained earnings = $10.BEYOND THE PAGEmhhe.com/brealey12eTry it!
Dynamic Mattress’s
spreadsheet