Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

II. Financial Statements

and Long−Term Financial

Planning

4. Long−Term Financial
   Planning and Growth

© The McGraw−Hill^139

Companies, 2002

One thing should be clear by now. Projected growth rates play an important role in

the planning process. They are also important to outside analysts and potential investors.

Our nearby Work the Webbox shows you how to obtain growth rate estimates for real

companies.

CONCEPT QUESTIONS

4.3a What is the basic idea behind the percentage of sales approach?

4.3bUnless it is modified, what does the percentage of sales approach assume about

fixed asset capacity usage?

108 PART TWO Financial Statements and Long-Term Financial Planning

Calculating company growth ratescan involve detailed re-

search, and a major part of a stock analyst’s job is to provide estimates

of them. One place to find earnings and sales growth rates on the Web is

Yahoo! Finance at finance.yahoo.com. Here, we pulled up a quote for Min-

nesota Mining & Manufacturing (MMM, or 3M as it is known) and followed the

“Research” link. Below you will see an abbreviated look at the results.

As shown, analysts expect revenue (sales) of $17.1 billion in 2001, growing to

$18.4 billion in 2002, an increase of 8.1 percent. We also have the following table

comparing MMM to some benchmarks:

As you can see, the estimated earnings growth rate for MMM is slightly lower than

the industry, sector, and S&P 500 over the next five years. What does this mean for

MMM stock? We’ll get to that in a later chapter. Here is an assignment for you: What’s

a PEG ratio? Locate a financial glossary on the Web (there are lots of them) to find

out.

Work the Web