Week 3 Chapters 12 Questions Question 12-3 Financial planning and forecasting are two very important tasks in venturing or adding additional capital to the business, thus these steps must not be skipped. Forecasting financial statements under alternative operating plans in order to determine the amount of capital needed to support the plan which is the Operating Assumption. Financial Policy Assumption which is to forecast the funds that will be generated internally and identify sources from which required external capital can be raised. These two assumptions produce in the formula of Additional Funds needed (AFN). The AFN equation is easy to use, and an analyst is able to project funds requirements quickly, bypassing the need to construct pro forma income statements and balance sheets. The equation method also permits quick recalculation of AFN with changes in the assumptions, and in addition, other variables in the equation can be readily solved for given a target AFN. But some potential disadvantages are as follows: ??It ignores economies of scale in asset utilization. ??Costly assets are assumed to be purchased incrementally. ??Can substantially under- or overstate state funds requirements, because the net profit margin and retention ratio are assumed constant from the base period. Question 12-5 Self-supporting growth rate is the maximum the growth rate the firm could achieve if it had no excess to external capital. This rate can be found as the value of g that, when use ...
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